the uk-nigeria remittance corridor - world bank

THE WORLD BANK

Raúl Hernández-CossChinyere Egwuagu Bun

W O R L D B A N K W O R K I N G P A P E R N O . 9 2

The UK-Nigeria Remittance CorridorChallenges of Embracing Formal Transfer Systemsin a Dual Financial Environment

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W O R L D B A N K W O R K I N G P A P E R N O . 9 2

The UK–Nigeria RemittanceCorridorChallenges of Embracing Formal Transfer Systemsin a Dual Financial Environment

Raúl Hernández-CossChinyere Egwuagu Bun

THE WORLD BANK

Washington, D.C. DFID Department forInternationalDevelopment

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ISBN-10: 0-8213-7023-5 ISBN-13: 978-0-8213-7023-0eISBN: 978-0-8213-7024-7ISSN: 1726-5878 DOI: 10.1596/978-0-8213-7023-0

Raul Hernández-Coss is a Financial Sector Specialist in the Financial Sector department of theWorld Bank. Chinyere Egwuagu Bun is a Junior Professional Associate in the same department.

Library of Congress Cataloging-in-Publication Data has been requested.

Contents

Foreword vii

Acknowledgments ix

Acronyms xi

Executive Summary xiii

Introduction 1

1. At the First Mile 5

Remittances and Migration in the UK 5

Nigerian Diaspora Community 8

Remittance Patterns 8

Remittance Service Providers 11

Circumstances that Influence Sender Choices 13

Legal Framework Affecting Remittance Transfers 15

UK Government Initiatives on Remittances 18

Main Findings in the First Mile 20

2. At the Intermediary Stage 21

Remittance Transfers through Formal Intermediaries 21

Remittance Transfers through Informal Intermediaries 24

Costs Associated with Formal Transfers 26

Market Opportunity for New Technologies 30

Payments Systems 32

Main Findings in the Intermediary Stage 35

3. At the Last Mile 37

Significance of Remittances for Nigeria 37

Locations of Nigerians Abroad 40

Remittance Beneficiaries 41

Using Remittances for Housing 43

Remittance Service Providers in Nigeria 43

Postal Service 48

Informal Funds Transfer Operators 49

Legal and Regulatory Framework Affecting Delivery of Remittances 50

Financial Market Integrity 51iii

Nigerian Government Initiatives on Remittances and Economic Growth 53

Key Findings in the Last Mile 54

4. Conclusions and Policy Recommendations 57

Conclusions 57

Policy Recommendations 62

Appendix A. United Kingdom Regulatory Overview 67

Appendix B. Nigeria Regulatory Overview 71

References 75

Map of Formal Flows in the UK-Nigeria Corridor and Current and Potential Networks for Distribution in Nigeria 81

LIST OF TABLES

1. Select Indicators for Nigeria 3

2. Remittance Transfer Fee from UK to Nigeria, May 2005 27

3. Value of Remittances Exchanged for Local Currency by Banks, 2002–05 29

4. Transfer Cost of £100 from UK to Nigeria 30

5. Key Payment Instruments in Nigeria 34

6. Breakdown of Home Remittances through MTOs by Country of Origin, 2002–04 41

7. Main Findings . 58

LIST OF FIGURES

1. Recorded Workers’ Remittances to Developing Countriesand Sub-Saharan Africa (1990–2004) 2

2. Top 15 Remittance-sending Countries, 2004 6

3. Migrant Communit 7

4. Market Shares of MTOs Operating in the UK-NigeriaCorridor, 2005 12

5. Circumstances that Influence Senders’ Choices 14

6. Typology for UK Risk-based Approach to AML/CFT 16

7. Channels for Origination in the UK and Distributionin Nigeria 22

8. MTOs Retail Prices for Sending Money from UKto Nigeria, April 2004 28

9. Workers’ Remittances to Three West African Countries 38

10. Workers’ Remittances to Nigeria, 1997–2004 39

iv Contents

11. Remittance Flow Origination by MTOs, 2004 40

12. Estimated MTO Market Share in the Originationof Remittance Transfers to Nigeria, 2005 44

13. Historic Data on the Different Foreign Exchange RatesAvailable in Nigeria, 2000–04 47

14. MTOs Average Fees for Transferring £500, 2004 61

LIST OF BOXES

1. Nigerian Migration History 9

2. MTN Top-up Card 13

3. Requirements for Opening a Bank Account in the UK 17

4. UK Money Transmitters Association 17

5. EU Payments Directive: New Legal Frameworkfor Payments in the Internal Market 18

6. Sending Money Home? Initiative 19

7. Bank Transfer Systems in the UK-Nigeria Remittance Corridor 23

8. Most Common Remittance Transfer Process from UK to Nigeria 25

9. Telecommunications Industry in Nigeria 31

10. CPSS/World Bank Task force for General Principleson International Remittance Systems 33

11. TARGET and SWIFT Payments Systems 34

12. How the CBN Compiles BoP Data 39

13. Making Ends Meet for Ekundayo and His Siblings 42

14. Common Uses of Remittances in Nigeria 42

15. Exclusivity vs. Multiple Agreements Agent for One MTO 45

16. Nigerian Postal Service 48

17. Bus Transport System and Money Transfer in Nigeria 50

18. Jefri Couldn’t Take His JAMB Exams 50

19. Nigeria’s Removal from NCCT List 52

20. Remittances + Housing = Market Opportunity: The Mexican Experience 60

A1. EU Payments Directive: New Legal Framework for Payments in the Internal Market 68

B1. Legislation to Combat Money Laundering and Financing of Terrorism in Niger 73

Contents v

Foreword

As part of the World Bank work on remittances, the Financial Market Integrity Unit ofthe Financial and Private Sector Development Vice-Presidency (FPD) is undertaking

a series of studies, Bilateral Remittance Corridor Analysis (BRCA). In complementing themacroeconomic analysis, these micro-level studies of specific remittance corridors aredirected at expanding knowledge on workers’ remittances to developing countries, with aview to developing best practices on options to protect the integrity of remittance marketsand improve efficiency and transparency of remittance flows.

The analysis of remittance corridors is providing new knowledge and facilitating bet-ter understanding on the size and nature of remittance flows, the incentives that influenceremittance senders and recipients in their choices of mechanisms to send money to fami-lies at home, policies by regulators on emerging new players such as money transfer oper-ators, and implications of compliance with standards on anti-money laundering andterrorist financing. These studies also provide new information useful to regulators in theirefforts to leverage on remittances toward improving access of remittance senders andreceivers to financial products.

These studies show that each remittance corridor has different characteristics. Infor-mation and analysis on each corridor provides the basis for policy choices specific toauthorities of each corridor. In particular, new information allows authorities to designpolicies that best meet local conditions, while also complying with international AML/CFTstandards.

The UK-Nigeria remittance study adds new knowledge and lessons to authoritiesand the private sector, in particular in the Sub-Sahara Africa region. The main outcomeof the UK-Nigeria Corridor study is the set of recommendations on policy choices forNigerian and UK authorities based on new information specific to the corridor. Suchinformation, as well as innovative experiences in several other corridors now provides astronger basis for the formulation of appropriate policies to suit local conditions, as wellas for improving effectiveness of oversight on new financial intermediaries in the finan-cial sector. The analysis will also assist authorities to take advantage of the flexibilitybeing accorded by standard-setters in implementation of measures affecting moneytransfers to meet international standards on anti-money laundering and combating ter-rorism financing.

In addition, new data and knowledge specific to the UK-Nigeria corridor adds valueto the private sector in terms of increasing transparency on cost of transfers, existing andpotential risks, new players in the market, existence of informal and unregulated transferchannels and value as well as sources and uses of remittance flows. Increasing trans-parency through dissemination of this information and analysis are important factors ininfluencing market competition among new and existing remittance service providers, aswell as facilitating greater compliance with international standards on anti-money laun-dering and combating terrorism financing. Another important developmental impact isthat knowledge of the nature and characteristics of the remittance markets and its players

vii

provide the entry point for authorities to design policies, and the private sector to developproducts that leverage on remittances to promote access to financial services for bothremittance senders and recipients.

Latifah Merican CheongProgram Director

Financial Market IntegrityFinancial and Private Sector Development Vice Presidency

The World Bank

viii Foreward

ix

Acknowledgments

This case study is part of the Bilateral Remittance Corridor Analysis (BRCA) beingconducted by the Financial Market Integrity Unity (FSEFI) of the World Bank. The

authors of this report are Raúl Hernández-Coss and Chinyere Egwuagu Bun. MartinJosefsson made significant contributions in initiating the study. Isaku Endo, KamilBorowik, and Ryan Crosby of the World Bank and Valsa Shah and Jan Wimaladharmaof the United Kingdom Department for International Development (DfID) providedcontributions.

We gratefully acknowledge the comments, guidance, and encouragement from LatifahMerican Cheong while writing this report. Special thanks to Samuel Munzele Maimbo,Fred Levy, Abwaku Englama, Chidi Okpala, and Bunmi Akinremi for providing indepthconsultations. The authors benefited from the thoughtful and helpful comments duringthe peer review process by Michael Fuchs, Samuel Munzele Maimbo, Thomas Muller, andStuart Yikona.

The following World Bank Group colleagues were remarkably diligent in facilitatingmeetings with Nigerian authorities and financial institutions in Abuja and Lagos: FrankAjilore, Macmillan Ikemefule Anyanwu, Ejura Phoebe Audu, Elias Tiamiyu Akanmu Bada,Justina Edomor Eimunjeze, Hafez M. H. Ghanem, Victoria Kwakwa, Nataliya Mylenko,Simon Nwaoha, Olayemi Okubena, Modupe Dayo Olorunfemi, David Omorodion,Temilola Sonola, Peer Stein, Mary Oluseyi Zackius-Shittu, and Lydia Waribo.

Special thanks to all who provided valuable comments, information, and logisticaladvice, especially during the field research in the UK and Nigeria: Sani Abba,A.Abo, FeyikemiAdebayo, Ogunkoya Adebiyi, Kike Adeyemi, Wole Afelumo, Molly Akanji, Ekundaya Akim,Akin Akinlabi, Dayo Akinmoyo, Olusegun Akinola, J.S.Akuns, Mahmoud Alabi, Sarah Alade,Ayo Alonsi, Adebayo Aluko, Ayo Arise, Eve Atkins, Philip Atkinson, Sola Awe, SholaAwoyungbo, Olatunbosun Ayileka, Ibrahim Mori Baba, Tijani Gbadamosi, Mike Banyard,Dr. Banjoko, Jefri Benedict, Richard Boulter, Leonardus Bun, Roger Easton, Barth Ebong, D.T.Egbe, D.A. Eke, Chika Ejinaka, Roger Ellender, Eric Fernstrom, Nneji Festus, Graeme Foed,Kemi Gasper, Moji Giwa-Osagie, Emma Haddad, Patrick Ibisi,Amina Ibrahim, N.T. Igba, O.I.Imala, Patience Imoukhuede, Isaac Inyang, Suzzane Iroche, Leon Isaacs, Jide Iyaniwura, EdithJibunoh, Oludayo Kufeji, Farouk Kurawa, Ezra Kure, Sunny Lambe, Mohammed Lawal,Tunde Lemo, Ray Mackie, Obadiah Mailafia, Ezinwa Mbogu, Susan Memuduagham,Mohmud Mohamed,Abubakar Muhammad, N.A. Muhammad, Moyosola Niran-Oladunni,Okwu J. Nnanna, Mrs. Nolisa, Samuel Obaniyi, Callistus Obetta, Bonnie Obijiaku, EnuoguObioha, Ndidi Obioha, C.O. Odiaka, Kunle Oguneye, Chinwe Okaro,Asishana Okauru, G.A.Oladejobi, Taiye Olaniyi, Olumide Olukoga, Salako Oluyemi, Charles Onwuagbu, PaulinusOjukwu, S.A. Oni, Patience Oniha, Nefeayoto Oniye, R.C. Onwe, Babatunde Osho, OladokunOye, Oyeronke Oyetunde, Peter Parker, Dominic Peachy, Barry Pennill, Miguel Rivarola, Mr.Romanus, Jon de Santos, Henry Semenitari, Foshola Shamsheeden, Abdulrahman BabaShani,Helen Smith,Olusegun Sofunke,Moremi Soyinka-Onijala,Farouk Suleiman,AbdulrazagTayibu,Agugoesi Tonie, Modibbo Tukur, Ja’afaru Brai Ugbodaga,Alhaji Umaru, Rose Uzoma,Kate Weir, and Catherine Wines.

Acronyms

ADB Asian Development BankABCON Association of Bureau de Changes Operators of NigeriaAML/CFT Anti-Money Laundering and Combating the Financing of TerrorismAFFORD African Foundation for DevelopmentBACS Bankers’ Automated Clearing ServicesBDC Bureau de ChangeBoP balance of paymentsBRCA Bilateral Remittances Corridor AnalysisBCSB Banking Codes Standards BoardBSD Banking Supervision DepartmentBTA business travel allowanceCBN Central Bank of NigeriaCCL Check and Credit Clearing CompanyCDD Customer Due DiligenceCFT Combating the Financing of TerrorismCHAPS Clearing House Automated Payment SchemeCOMPAS Centre on Migration, Policy and SocietyCPSS Committee on Payment and Settlement SystemsDfID Department for International DevelopmentEC European CommissionECB European Central BankECOWAS Economic Community of West African StatesEFCC Economic and Financial Crimes CommissionEFT electronic funds transferEU European UnionFATF Financial Action Task ForceFDI foreign direct investmentFFT formal funds transferFSA Financial Services AuthorityFT funds transferFX foreign exchangeGSM Global System for Mobile communicationsHMCE Her Majesty’s Customs and ExciseHMRC Her Majesty’s Revenue and CustomsHTA Hometown AssociationIADB Inter-American Development BankIFEM/DAS Inter-bank Foreign Exchange Market/Dutch Auction System IFT informal funds transferIMF International Monetary FundIMO international money orderINCSR International Narcotics Control Strategy ReportIOM International Organization for Migration

xi

IT information technologyKYC Know Your Customer£ British PoundML money launderingMSB Money Service BusinessMTO money transfer operator

Nigerian Naira (NGN)NCB national central bankNCCT Non-Cooperative Countries and TerritoriesNCIS National Criminal Intelligence ServiceNFIU Nigeria Financial Intelligence Unit of the EFCCNGN Nigerian nairaODA official development assistanceOECD Organisation for Economic Co-operation and DevelopmentOFID Other Financial Institutions Department (CBN)OFT Office of Fair TradingONS Office of National StatisticsOPEC Organization of Petroleum Exporting CountriesPEP Politically Exposed PersonPMI primary mortgage institutionPTA Personal Travel AllowanceRCP Remittance Country PartnershipROSCA Rotating Savings and Credit AssociationRSP remittance service providerRTGS real-time gross settlementSEPA Single European Payments AreaSOCA Serious Organized Crime AgencySSA Sub-Saharan AfricaSTR Suspicious Transaction ReportSWIFT Society for Worldwide Interbank Financial TelecommunicationTA technical assistanceTARGET Trans-European Automated Real-Time Gross Settlement

Express TransferTT technology transferUBA United Bank of AfricaUNDP United Nations Development ProgrammeUSAID United States Agency for International Development

Currency Conversions

US$1 = £ 0.552815 US$1 = 132.853£1 = US$1.80892

xii Acronyms

N

N

xiii

Executive Summary

This report describes how United Kingdom residents of Nigerian origin transfer remit-tances home and how the funds are distributed to their beneficiaries in Nigeria. The

review presents the remittance industry conditions existing in the UK-Nigeria remittancecorridor at the origination and distribution stages of the transactions, and the intermedi-aries who facilitate the transfers. The report makes conclusions and compares these mainfindings with lessons from other corridors. It also suggests policy actions to promote for-mal transfers and potentially increase the integrity and efficiency of the remittance marketin the UK and Nigeria.

To facilitate remittance flows and realize the development and poverty reductionpotential in recipient countries, the World Bank is studying remittance systems around theworld through the Bilateral Remittances Corridor Analysis (BRCA) initiative. This reportis the first BRCA that studies flows from Europe to Sub-Saharan Africa (SSA). The reportwill feed into a forthcoming remittance corridor comparison across regions that will iden-tify common characteristics and lessons on how to encourage formal remittance flows inboth sending and receiving countries, and promote integrity and transparency.

The UK is among the top 10 remittance-originating countries worldwide. In 2004the officially recorded flow from the UK to developing countries was US$4.42 billion. Anestimated 10–15 percent of these flows went to Nigeria. Nigerians have been migratingto the UK for over 50 years and have an established a highly-educated migrant commu-nity with professional jobs that sends money home frequently. Yet, no specialized remit-tance products for this corridor have evolved besides the generic favored cash-to-cashmoney transfer operators (MTO) transfers and the expensive and lengthy account-to-account bank transfers.

Nigeria is the largest recipient of remittances in SSA. The country receives nearly65 percent of officially-recorded remittance flows to the region and 2 percent of globalflows. The Central Bank of Nigeria (CBN) began collecting data on remittances in 2002. Itreported approximately US$2.26 billion in remittances for 2004. As is the case for othercountries in the region, underreporting of remittance flows to Nigeria is common becauseof data collection deficiencies and the prevalence of informal transfer mechanisms. The lat-ter account for 50 percent of total flows to the country.

The UK-Nigeria remittance corridor has an equal dominance of formal and informalremittance intermediaries. Although several formal financial institutions for transferringmoney exist in the UK, many people choose to send money informally. The most commonmethod is to give a person traveling to Nigeria cash to deliver to beneficiaries. Sometimes,remittances are in kind, for example, clothes or cars, or a phone card (and sending the PINby e-mail). In Nigeria, with over 3000 commercial bank branches, a dual financial envi-ronment comprising formal and informal service providers competes for clients. This envi-ronment exists due to Nigerians’ distrust of the formal institutions, poor transport, andcommunications infrastructure outside urban areas, and an inefficient payments system inwhich over 90 percent of transactions are in cash.

Senders who choose the formal system use MTOs most frequently. In the UK, a sendercan walk into an MTO outlet and initiate a transaction. In Nigeria, only banks have the

xiii

license to disburse remittances. Therefore, MTOs in the UK must have a Nigerian bankagent to complete their transactions. The beneficiary picks up the transfer from the bankin Nigeria in foreign currency or Naira by showing identification and presenting a uniquetransaction code. A beneficiary who chooses to take the money in foreign currency usuallychanges it at a Bureau de Change (BDC). Often, if the beneficiary is in a rural area, moneysent formally may require an informal component when it reaches Nigeria. In this case,when the money gets to Nigeria, a designated person picks it up and carries it via publictransportation to the beneficiary. Bank account holders often can transfer money to Nigeriathrough correspondent banks and the Society for Worldwide Interbank Financial Telecom-munication (SWIFT).

UK banks are cautious about conducting transfers to Nigeria because of reputationalrisks associated with Nigeria’s financial sector and their conservative approach to account-holder relationships.Financial crimes such as advance-fee-fraud and corruption by politically-exposed persons are prevalent in Nigeria. Equally damaging was Nigeria’s presence on theFinancial Action Task Force’s (FATF) list of countries with regimes weak in combatingmoney laundering and financing terrorism. The country’s inclusion on the list caused othercountries to scrutinize transactions with Nigerian banks and created a perception of distrustof Nigerian financial institutions. Against this background, UK banks have been reluctantto engage in this remittance market by developing specific remittance products for formaltransfers to Nigeria. UK banks have done so in other corridors, such as India.

Several issues deter a strong shift to formal transfers in the UK-Nigeria corridor. Dataare deficient in the UK and in Nigeria on the size of remittances, cost structure of trans-fers, and beneficiaries’ use of funds. This data is essential to make policies to increase thedevelopment impact of the flows, increase transparency, and develop new products thatincrease Nigerians’ access to financial services. The UK’s minimal MTO registrationrequirements make banks uncomfortable in maintaining accounts for them. The legal andregulatory framework in Nigeria restricts competition and the development of remittanceinfrastructure that leverages new technologies. The new Anti-Money Laundering andCombating of Financing of Terrorism (AML/CFT) regime presents an opportunity toreduce these negative perceptions.

More collaboration between the UK and Nigeria is necessary to develop the remittancemarket, encourage the use of formal channels, and enhance the development potential.Among its benefits, the remittance country partnership (RCP) between UK and Nigeriaaims to reduce the cost of remittance transfers. The Nigerian government is engaging itsdiaspora to help grow the economy.

This report recommends that each government: (1) focus on improving data collec-tion at its end of the corridor, and (2) do more research to provide its policymakers and itsprivate sector with accurate information. Revising the regulatory and legal framework forremittances in Nigeria is necessary to stimulate competition, reduce costs, and extend dis-tribution points to rural areas. Revisions could include prohibiting exclusive contractsbetween banks and individual MTOs, licensing BDCs to conduct money transfers, build-ing the capacity of the postal service to conduct remittance business, and engaging thetelecommunications sector in the industry.

xiv Executive Summary

Introduction

In 2004, developing countries received approximately US$126 billion in remittances, anincrease since 2001 of $41 billion, or 49 percent (World Bank 2005b). Official flows toSub-Saharan Africa (SSA) are relatively low in comparison to other developing coun-

tries; World Bank data on worker remittances show that official flows to SSA in 2004 wereUS$6.1 billion, or approximately 5 percent (Figure 1).

Underreporting Remittances

Actual remittance flows for Africa are much higher than statistics suggest, because remit-tances are heavily underreported (Sander and Maimbo 2003). Regardless of a more accu-rate figure on remittance flows to the region and their underreporting, the economicdevelopment prospects for the Africa region are low in comparison to other regions. Withthe exception of SSA, all Regions expect to achieve the Millennium Development Goal(MDG) of reducing poverty by 50 percent from their 1990 levels by year 2015. Unless itseconomies grow significantly, Africa in general will continue to fall behind the rest of theworld (World Bank 2006b). Remittances can complement development initiatives by pro-viding a consistent source of additional income for people in developing countries.

Bilateral Remittance Corridor Analysis

To facilitate remittance flows and realize the development and poverty reduction poten-tial in recipient countries, the World Bank is studying remittance systems around the world

1

through its Bilateral Remittances Corridor Analysis (BRCA) initiative. This report is thefirst BRCA that studies flows from Europe to SSA. The report will feed into a forthcomingremittance corridor comparison across regions. The comparison will identify commoncharacteristics and lessons on how to encourage formal remittance flows in both sendingand receiving countries, and promote integrity and transparency.

The two objectives of this report are to provide an overview of the United Kingdom-Nigeria remittance corridor and to suggest five policy recommendations. The recommen-dations will highlight how to:

1. Encourage the use of formal remittance systems,2. Improve transparency and integrity of the financial sector,3. Reduce remittance transfer costs,4. Improve data collection practices, and5. Increase the development impact of remittances in Nigeria.

UK Involvement in the Remittance Discussion

The UK has initiated industry studies to improve transparency and encourage formal sys-tems. An example is the recent “Sending Money Home? A Survey of Remittance Productsand Services in the UK” (DfID 2005a). This publication followed the G8 Summit in SeaIsland 2004 at which countries agreed that remittances should be more accessible and avail-able at a lower cost. The publication is a significant step toward the goal of increasing infor-mation and lowering costs. It also provides information on relevant products for six targetcountries including Nigeria.

2 World Bank Working Paper

Figure 1. Recorded Worker’s Remittances to Developing Countries and Sub-SaharanAfrica (1990–2004)

Source: World Bank

31.3

56.7

76.884.6

99

125.8116

6.165.14.94.93.21.90

20

40

60

80

100

120

140

1990 2001 2002 2003 2004eYear

Bill

ion

s U

S$

Developing countries Sub-Saharan Africa

1995 2000

Nigeria in the Context of West Africa

Nigeria is in West Africa, which has a history of extensive migration. One-third of WestAfricans are estimated to live outside their town of birth (Black and others 2004). Theimplementation of the ECOWAS Protocol on free movement of persons1 has enhancedmigration within the region.2 When West Africans migrate out of the region, they tend tomigrate to European countries with whose people they share historical relationships and acommon national language and that have more economic opportunities. Thus, migrantsfrom francophone countries usually migrate to France, and those from Anglophone coun-tries usually go to the UK. Hence, the bulk of remittances to countries such as Ghana andNigeria tend to flow from the United Kingdom.3

Nigeria is the most populous African nation. Its over 130 million people account for47 percent of West Africa’s population, and 41 percent of the West Africa region GDP(World Bank 2006c). The country is a member of ECOWAS and a leading player in theBritish Commonwealth, and maintains a long historical relationship with the UK There iswidespread belief that Nigerians are the largest single African national group living inEurope and North America (Black and others 2004). Table 1 shows how Nigeria’s workers’remittances and employee compensation received in 2004 compared to select indicators.

The UK–Nigeria Remittance Corridor 3

Table 1. Select Indicators for Nigeria

GDP (current US$) 72.1 billion

Workers’ remittances and CoM, received in relation to GDP (%) 3.15

Workers remittances and compensation of employees (US$) 20.9 million

Workers’ remittances and CoM, paid in relation to GDP (%) 0.03

Foreign direct investment, net inflows (BoP, current US$) 1,870 million

FDI in relation to GDP (%) 2.60

Official development assistance and official aid (current US$) 573 million

ODA in relation to GDP (%) 0.80

Exports of goods and services (current US$) 39.4 billion

Imports of goods, services, and income (BoP, current US$) 17.1 billion

Workers’ remittances, received and CoM to FDI (%) 121.22

Workers’ remittances, received and CoM to ODA (%) 396.36

Workers’ remittances, received and CoM to exports (%) 5.77

Workers’ remittances, received and CoM to imports (%) 13.26

Source: World Bank 2006a.

1. The Economic Community of West African States (ECOWAS) was established in May 28, 1975 inLagos. ECOWAS aims to promote cooperation and integration within the States and, as an ultimate goal,to establish a West African Economic Union that would enable free movement of persons without visawithin the West African subregion.

2. For example, in Ghana there are 500,000 West African immigrants working on cocoa farms and inthe hotel industry.

3. The United States also has become a major source of remittances to the region.

UK-Nigeria Remittance Corridor

A distinguishing feature of this remittance corridor is that, although formal financial insti-tutions are present at both ends, approximately half of the funds flow informally to Nigeria.4

When studying remittance flows to Nigeria, it is important to consider the dual nature ofthe financial environment in the country in which viable formal and informal financialsystems and institutions coexist. The challenge is not the lack of formal systems but theneed to increase incentives for senders and recipients to embrace these systems.

Outline of the Report

In line with earlier studies under the BRCA Initiative (Hernández-Coss 2005a, 2005b), thispaper is organized around the three fundamental stages of a remittance transaction:

1. Chapter 1, or The First Mile, focuses on the origination stage, whereby Nigerians inthe UK make their decisions regarding the amounts to send home and chooseamong the alternative remittance instruments and service providers available tothem.

2. Chapter 2, or The Intermediary Stage, focuses on the payments infrastructure andhow the funds are transferred by remittance service providers in the UK to distrib-ution service providers in Nigeria.

3. Chapter 3, or The Last Mile, focuses on the distribution stage, in which the funds arepaid to the recipients in Nigeria.

Chapter 4 presents conclusions, policy recommendations, and an action plan, based on themain findings of the study, for consideration by authorities and policymakers in both theUK and Nigeria.


4. This estimate is the result of field interviews. It is consistent among market participants in both theUK and Nigeria, public sector officials, and literature review conducted by the World Bank.

CHAPTER 1

At the First Mile

This chapter summarizes research findings on the origination of the remittancetransactions in the UK based on interviews with authorities, remittance industryplayers, Nigerian senders, and relevant literature. It discusses remittance transfers

and migration; the Nigerian community and its remitting patterns; main characteristicsof remittance service providers; circumstances that influence senders’ choices; legal andregulatory framework affecting remittance transfers, particularly integrity and transparencyof flows; and UK government’s initiatives on remittances.5

Remittances and Migration in the UK

Africa, Eastern Europe, and South Asia are major regional destinations for UK remittances(DfID 2005a). In Africa, the majority of remittances from the UK go to Ghana, Kenya,Nigeria, Somalia, and South Africa. In 2004 the estimated remittance outflow from the UKto developing countries was £2.3 billion,6 or approximately US$4.42 billion.7 This representsan increase of approximately 77 percent since 2001 (Figure 2).8

5

5. This section presents estimates from the World Bank, the UK Remittance Working Group, DfID,IMF, and public and private sector officials and remittance senders interviewed in the UK.

6. UK Remittances Working Group 2005 and DfID estimates based on experience with the RCPdiscussions with central banks and development activities.

7. Bank of England US$/£ exchange rate of 1.91990 for December 31, 2004. 8. According to World Bank (2003) estimates, in 2001 the UK ranked 16 of the top 20 country sources

of remittance payment worldwide, with an estimated outflow of US$1.3 billion.

No official data exists on the volume of the remittance corridor between the UK andNigeria. The World Bank estimates that Nigeria receives 10 percent to 15 percent of totalremittances originating from the UK—a remittance corridor value of US$450–650 million.9

These estimates take into consideration the population of Nigerians in the UK; the averageremittance transaction, which is US$300–400 monthly; and comparisons to othercountries in the region. For example, the UK-Ghana remittance corridor is valued atUS$360 million.10

United Kingdom: A Multicultural Nation

The UK is home to approximately 4.8 million foreign-born people of all ages. Approxi-mately 3.6 million of these are of a working age 25–49 (Haque 2002). To be British in thepresent day implies a person who might have her/his origins in Africa, the Caribbean,


Figure 2. Top 15 Remittance-sending Countries (2004)

Source: World Bank, DFID/UK Remittance Working Group estimates for UK flows.

1.937

2.116

2.402

3.05

4.42*

4.74

4.85

5.411

5.564

10.44

12.796

13.55

38.75

1.826

1.42Japan

Oman

Belguim

Israel

Kuwait

The Netherlands

United Kingdom

Italy

France

Spain

Luxembourg

Germany

Switzerland

Saudi Arabia

United States

Volume of Flows (US Billions)

9. Bank of England. Exchange rate August 2005, US$1 = £0.552815, or £1 = US$1.80892.10. Bank of Ghana 2005.

China, Greece, India, Turkey, the UK, or anywhere else in the spectrum of nations.11

Although different groups have migrated to the UK for millennia, several groups whomigrated within the last 40 years still maintain close economic and social ties with theircommunities at home. The largest proportion of UK’s current migrant population wasborn in other countries within the European Union (23 percent),12 followed by those fromthe Indian subcontinent (20 percent), and Africa (19 percent). Relatively few have comefrom the Middle East (3 percent), Eastern Europe (3 percent), Australasia (4 percent), andothers (1 percent). Half of those who are foreign-born are UK nationals, even althoughthey were originally migrants (Figure 3; Kempton 2002).


Figure 3. Migrant Community in the UK

Source: World Bank, COMPAS 2004, and Kempton 2002.

Origin of Migrants by Region

European Union23%

Indian Subcontinent20%

Africa 19%

Americas 11%

Rest of Asia 10%

Australasia 4%

Western Europe 5%

Middle East 3%Eastern Europe 3%

Migrants of Nigerian Origin in the UK

Glasgow

Edinburgh

Leeds

Liverpool

Manchester

Greater London

The UK census in 2001 reported 86,958Nigerian living in the UK with about 80%or 68,907 living in the Greater London.Of these, 45,508 live in Inner London, i.e.Peckam, with the highest degrees ofconcentration in Southwark (10,673),Hockney (6633), Lambeth (6121), andNewham (5423). About 23,399 Nigerianslive in Outer London, concentrated inGreenwich (3918), Brent (3070), andBannet (2753). This data does not includeNigerians who are considered blacks ofAfrican descent.

11. Philips, Mike. BBC History. “Windrush-the Passengers.” www.bbc.co.uk/history/society_culture/multicultural/windrush_01.shtml

12. The UK has been experiencing increasing migration from the new European Union countries. Forexample, the new states that joined the EU in May 2004 were Cyprus, Czech Republic, Estonia, Hungary,Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia. Within 6 months (by November 2004), almost91,000 people from those 8 states had registered to work in the UK. Poland accounted for 48,500, or morethan half, of the applicants. Management Issues News. www.managementissues.com/display_page.asp?section=researchandid=1654

Nigerian Diaspora Community

Approximately 90,000 Nigerians live in the UK. Over several decades of migration, they haveestablished a significant migrant community and regularly send remittances home.13 Themajority of those recorded live in Greater London and, of these, half live in inner London(Shah 2005). Research indicates that this figure may be higher and does not include theundocumented and UK citizens of Nigerian descent. Nigerian remittance senders includethose who are UK citizens, those who have a “right of abode” or permanent residence, thosewho are in the UK on a temporary status such as a student or work visa, those who have ille-gal status because their visas are expired, and those who are undocumented (Box 1).

Ethnic, religious, and regional differences existing in the Nigerian community in theUK make this a very diverse group. Of the over 250 distinct ethnic groups who make upNigeria, two of the major groups—the Ibos from the Southeast and the Yoruba from theSouthwest—constitute a significant number of the migrant population (EIU 2005). Otherethnic communities include the Edo and the Ogoni.

The majority of the Nigerian population in the UK is highly educated and professional(Elam and Chinouya 2000). Nigeria has experienced the emigration of thousands of highlyeducated professionals including in financial institutions and in the information technol-ogy industry, lawyers, physicians, nurses, and entrepreneurs.14 Some work as taxi drivers,traffic wardens, and transportation workers industry. Therefore, its diaspora provides asubstantial contribution of remittances to Nigeria (Van Hear 2004).

Remittance Patterns

The typical remitter is altruistic and sees remittances as a means of providing economicsupport to individual recipients at home. The migrants interviewed stressed the impor-tance of being able to stay in touch with their families and improve the economic situationby sending remittances. The Nigerian culture in general requires the more fortunate fam-ily members to provide for the less fortunate, and parents to invest in their children, whoin turn will take care of them in their old age. Since there are limited formal welfare sys-tems in Nigeria, senders often feel obligated to provide for immediate family members aswell as for extended family, friends and orphans.

Remittances to Nigeria can be for individual or collective use. It is normal for a migrantto remit money to friends on a regular basis to provide for the welfare of his or her rela-tives, for example, elderly parents. A growing trend is for Nigerians living abroad to sendtheir children to boarding schools in Nigeria and bring them back to the UK for their uni-versity education. These parents often remit money to their children in the boardingschools for living expenses. The length of stay and the level of skills of the sender determinethe remittance patterns for individual remittances.15


13. COMPAS 2004. The exact figure from the UK census in 2001 was 86,958. 14. Among the migrants to the UK, Nigerians are recognized as being very entrepreneurial.15. World Bank interviews, 2005 and 2006.

The length of stay determines sending patterns. Sending patterns are different formigrants who plan to return after temporary residence abroad, those who prefer to main-tain residences in both countries, and some who have no plans to return.16 Migrants withcloser ties to Nigeria tend to remit money more frequently. Those who intend to returnafter a temporary period set a target amount to save and, after accumulating the target sav-ings, move back. Sometimes they send money periodically to Nigeria to finance real estateso that, when they return, they have a home.17 Some individuals move back home once theyfulfill, or pass on to someone else, their obligations such as paying for education and sup-porting family at home.


Box 1: Nigerian Migration History

1950s–70s 1980s 1990s-present

Many Nigerians A significant Recently, the trend has been for Nigerians

from elite and wave of Nigerian to remain in the UK and become established

skilled sectors of the migration to the professionals. After a period of residence,

population were UK began in the some Nigerians become eligible for British

encouraged to move mid-1980s, after citizenship, and often their offspring are

to England to study Nigeria’s British citizens by birth.

and then return to economy began

Nigeria to take to slow and Black UK citizens are usually described as

positions left by the political tension Black of African or of West

departing British ensued. Indian/Caribbean descent. If a Nigerian

administration.* becomes a citizen by birth, descent, or

The majority of naturalization, then s/he is counted as part

these Nigerian of the Black of African Descent ethnic

communities have group. This categorization makes it difficult

been established in to determine the population of Nigerian

the UK since the origin who are sending remittances home.

1960s following

independence from Many of these people, including second and

Britain. third generation who were born in the UK

and are British, still maintain close ties with

their families at home, and send

remittances regularly.

Source: Elam 2000, World Bank interviews, DFID 2005b.

16. Based on World Bank interviews in the UK and Nigeria, April 2005. 17. Sending money toward the acquisition of assets such as land and financing does not always mean

that the migrant plans to return home to Nigeria. Such transmittals could be the means to provide directhousing services to the home family, or a signal of the migrant’s resource commitment to the home fam-ily. For example, in Osili’s study (2001) of Nigerian emigrants in the United States, approximately half ofthe sample had initiated substantial housing investments in their communities of origin in SoutheasternNigeria. Approximately half of the houses that make up migrants’ residential housing investments inhome villages are occupied by the migrants’ home family in Nigeria in the absence of rental payments.

Some migrants maintain residences in both UK and Nigeria. Those who migrated aschildren tend to live in the UK and visit home occasionally. Some children born and raisedin the UK diaspora have never been to Nigeria, and a few Nigerians may never move backif they have lost connection with relatives in Nigeria, if they are living undocumented inthe UK, or if they cannot afford to go home.

Sending patterns vary between highly skilled migrants with high salaries and low-skilled migrants with low wages. Often the highly professional migrants tend to have anassociated high standard and cost of living. Because of their lifestyle commitments, such asmortgages, and expensive car payments, they do not regularly send remittances. They tendto send money seasonally during the holidays or for social events such as weddings andfunerals, and send large amounts at a time.

It appears that the Nigerian migrants in the lower income brackets send money morefrequently through migrants carrying cash and have more affiliations within the commu-nity.18 The migrants involved in unskilled labor often live with wealthier Nigerians, do notown houses, and tend to send the bulk of their money home. Many in this group arewomen, who have left their families at home because of desperate economic reasons andsomehow have ended up in the UK. They will send money home frequently at any cost.

Collective Remittances

In the UK, Hometown Associations (HTAs), diaspora networks, and interest groups existto influence homeland politics, develop social projects in Africa, and the raise the profes-sional development of the migrants in the UK (COMPAS 2004). Nigerian HTAs have astrong presence in the UK as well as in other Anglophone African countries, such as Ghana.These HTAs tend to be the most common means of sending collective remittances hometo counterpart communities in Nigeria for development projects such as scholarship fundsand community projects. For instance, Odoziobodo Club of Ogwashi-Ukwu, based inLondon, supports the development of Ogwashiuku town in Nigeria (COMPAS 2004).

The majority of HTAs remain unregistered as charities and do not develop formallyas nonprofit organizations. The leadership of these HTAs are volunteers, people who haveother occupations. They raise funds among group members and transfer it physically incash to their hometowns. Most of them do not employ the use of money transfer opera-tors (MTOs). In some remittance corridors, the home governments match funds sent bymigrant HTAs for community development.19 There are lessons that the Sub-SaharanAfrica (SSA) nongovernmental organizations (NGOs) and HTAs in the UK can learn fromthe Latin American experience of aligning HTAs in America with the municipal, state, andfederal governments in their home countries. However, there are constraints on how


18. Based on World Bank interviews with the Nigerian Subcommittee on Migration and the Economicand Financial Crimes Commission–EFCC, Abuja, Nigeria, in March 2006. Subcommittee members inter-viewed include representatives from the Federal ministry of Labor and Productivity, Special Assistant tothe President on Migration and Humanitarian Affairs, Special Assistant to the President (Human Traf-ficking and Child Labor), and the Director of Programs, Office of the Special Assistant to the Presidenton (Migration and Humanitarian Affairs.)

19. In the U.S.-Mexico corridor, migrants’ collective remittances through HTAs are matched by thefederal, state, and municipal governments in a “3 × 1” program to fund projects such as roads and schools.

various home governments are structured that could make a three-party approach ofremittance backing by governments challenging in the Region.20

Often, the ethnic characteristics of the African HTAs limit the adoption of 3 × 1schemes. The ethnic subdivisions within the diaspora community are the bases for HTAs,which organize around the traditional authority, for example the chief, Oba, Eze, or Emirin Nigeria. Usually the traditional authority works in parallel to the institutional levels ofgovernment, and social welfare programs are limited to indigenes or subjects of that spe-cific area. For example, if the resident of a town in Nigeria is not originally from that areain terms of ethnicity, the traditional authority or chief would not consider him or her tobe a subject and thus has no obligation to provide for that person’s welfare.21

Remittance Service Providers

In the UK, Remittance Service Providers (RSPs) include banks, money transfer operators(MTOs), and informal providers. Formal money transfers occur through the MTOs (cash-to-cash), banks’ bank-to-bank transfers (account-to-account), postal service (cash-to-cash), card value transfer, and informally mainly through people carrying cash.22 MTOstend to offer lower rates than banks and target the regular and low-value-service customerswhile UK banks tend to market their remittance services to high-value account holders(DfID 2005a).

MTOs have the largest market share for remittances originating through formal chan-nels, with Western Union as the biggest market player (DfID 2005a). There are approxi-mately 1,000 MTOs registered in the UK23 The remittances sent via MTOs frequently arrivein less than 24 hours. Some MTOs have the ability to transfer the remittances in as little as15 minutes (Figure 4).

UK banks are cautious about participating in this corridor and developing remittanceproducts for nonaccount holders. So far, no UK bank has developed any specific remit-tance products for Nigerian migrants who send money frequently, as is the case in otherdestinations, for example, India. UK banks offer only generic products such as electronicpayments via Society for Worldwide Interbank Financial Telecommunication (SWIFT)and bank draft payments. Some offer an International Money Order (IMO) service inBritish pounds or U.S. dollars. Remittance transfers through banks take 2–10 days, signif-icantly longer that MTOs’ processing time (DfID 2005a). Some UK banks perceive a


20. Based on World Bank interviews with African Foundation for Development (AFFORD),February 2006.

21. Often a person can live and interact within a community for several years and not be consideredan indigene or member of the community for traditional purposes because his or her ancestral line orig-inated elsewhere.

22. When there is an emergency, formal channels such as MTOs and banks are the preferred channels.As in other African countries, such as South Africa, Christian burial rituals are often expensive. Usually,certain events that are communally organized require funding from Nigerians abroad. In Nigeria, whena person dies, the first question commonly asked is whether s/he has a child or relative abroad. This fam-ily member abroad is often required to send US$1,000–2,000 to help with funeral arrangements.

23. According to the Her Majesty’s Revenue and Customs (HMRC), the supervisory body for moneyservices businesses in the UK.


Figure 4. Market Shares of MTOs Operating in the UK-Nigeria Corridor, 2005

Source: DFID consultation with key market participants 2005.

3% Travelex/Vigo/Ria

10% MoneyGram

80% WesternUnion

7% Others

reputational risk with doing business with Nigerian banks. According to the UK NationalCriminal and Intelligence Service (NCIS) and UK banks, financial crimes associated withNigeria are mainly of a fraudulent nature.24 Incidents such as travelers’ check fraud,advance fee fraud (“419”),25 and corruption cases involving Politically Exposed Persons(PEPs) deter UK banks from conducting business with Nigeria.

The UK Postal Service has a very large network, making it one of the most accessible orig-ination points for remittance transfers. The postal service26 provides access to everyone wholives in the UK through its mail, post offices, parcel businesses, and money transfer servicesthrough money orders and MoneyGram.27 British postal orders are redeemable in 47 coun-tries. In partnership with MoneyGram, money transfer services are available to more than84,000 locations in 170 countries, including Nigeria.28 MoneyGram has the largest network inthe UK, largely due to the Post Office’s providing 3100 of MoneyGram’s 4000 locations.29

The communications industry is developing new mechanisms, such as phone card valuetransfers, to remit money. This service allows Nigerians living in the UK to buy airtime and

24. NCIS has been absorbed into the Serious Organized Crime Agency (SOCA).25. Advance fee scam, also known internationally as “Four-One-Nine,” or “419,” referring to the

fraud section of the Nigerian criminal code. 26. The group is a member of the Universal Postal Union (UPU). The postal services of the UPU’s 190

member countries form the largest physical distribution network in the world. www.upu.int/about_us/en/glance.html

27. The group collects, processes, and delivers 82 million items to 27 million addresses each day. RoyalMail Group Plc. www.royalmailgroup.com/home.asp

28. www.postoffice.co.uk/portal/po/content2?catId=19400180andmediaId=1970017629. UK Remittances Working Group and DfID 2005. MoneyGram’s partnership with the Post Office

in the UK shows the value of establishing relationships that leverage existing infrastructure.


Box 2: MTN Top-Up card

The MTN top-up card is very easy to use and is activated through a five-step process:

Step 1. Purchase a MTN top-up card from any participating retail outlet or agent.

Step 2. Scratch off the covered area to reveal secret top-up PIN, a 12-digit number.

Step 3. Contact relative back home to pass on the top-up PIN.

Step 4. Nigerian recipient keys in the PIN into her/his phone to load the airtime according.

Step 5. Nigerian recipient’s account with MTN is credited with the airtime value of the top-up denomination immediately (MTN Nigeria network terms and conditions apply).

For problems with the service, the recipient can call the MTN Nigeria helpline on her/his hand-set, or another helpline for subscribers outside of the MTN network. The sender can send as manyPINs as s/he wishes, and there are discounts for affiliate groups or bulk orders.

Sources: MTN Nigeria, www.mtnonline.com/product/tucfaqs.asp#2, www.uk2nigeriatopup.com/FAQS.html

send it to their friends and family in Nigeria. Top-Up cards are telephone cards with trans-ferable value, purchased in the UK and used in Nigeria by beneficiaries to make phone calls(Box 2). Since typical money transfer rates and commissions are expensive and minimumtransfer values are approximately £100, sending a “Top-Up PIN” is cheaper and easier thansending small amounts of money home to help relatives pay their telephone bills. Thesecards are available in £2.50, £8.50, and £17.00 denominations.30

Informal providers transfer an estimated 50 percent of the remittances in this corri-dor.31 Sometimes third parties are involved, and some people develop a good reputationfor physically carrying and delivering money to beneficiaries. These informal services arefree; however, some senders may give the messenger a gift such as a bottle of wine or a shirtas an expression of gratitude. Sometimes, a Nigerian who is in the United States or UK tem-porarily for business can request funds from a resident to use while abroad When shereturns to Nigeria, she provides the equivalent of the money in Naira, at a pre-agreed rate,to the relatives of the person who loaned her the funds in the United States.

Circumstances that Influence Sender Choices

Convenience, favorable foreign exchange rates, senders’ residency status, use of formalfinancial services, and limited knowledge of available remittance options are the maininfluences affecting senders’ choices (Figure 5). Senders consider MTOs, and graduallybanks, as the most reliable means of sending money home. Senders also perceive informalproviders, such as migrants carrying cash, to offer security and ultimate sending and receiv-ing convenience with no commission (DfID 2005a).

Remittance channels that offer customers convenience attract more clientele. It is con-venient to send cash through persons traveling home to Nigeria to deliver to family,

30. MTN top-up card, www.uk2nigeriatopup.com/index.html31. This estimate is based on World Bank interviews with UK authorities, banks, MTOs, and remit-

tance senders.


Figure 5. Circumstances that Influence Senders’ Choices

Source: World Bank 2006.

Banks/MTOs Informal

Existent/LowNon-existent/Low

Convenience

Remittances paid inforeign currency

Residency status

Frequency of useof formal

financial services

Level of knowledge ofavailable formal

remittance options

friends, and acquaintances. The sender enjoys a personal contact with the courier and doesnot need to go to the physical office of a bank or an MTO. The persons transporting cashdo it as a favor, at no cost to the remitter. With a few exceptions, sending cash through thismechanism is reliable because both the senders and recipients know and trust the migrantcarrying cash. The migrant also gives the recipient news of their relatives’ welfare in the UKand deliver letters and gifts from the remitters. On the other hand, sending money throughMTOs is convenient especially during emergencies when no one is available to physicallytransport cash.

Senders want their beneficiaries to get a favorable exchange rate and more value in thelocal currency. In Nigeria, recipients have the option of receiving the remittances sentthrough banks and MTOs in Nigerian Naira ( ), or in hard currency such as U.S. dollars,British pounds, Euros, and CFA. Money sent physically in hard currency also relies onbureau de changes (BDCs) for foreign exchange instead of a bank, for the same reasons.

N

The residency status of the sender in the UK is a consideration when choosing a remit-tance channel. Undocumented residents may prefer to send money through the informalsector to avoid interaction with formal institutions that require I.D., such as passports.These individuals fear disclosing their immigration status and possible deportation.

Users of the informal systems often have a low level of awareness of the benefits andincentives available in the formal system.32 Senders who are aware of the available remit-tance options tend to send money formally; those who do not use formal financial servicestend to send money home through informal means.

Legal Framework Affecting Remittance Transfers

The UK legal and regulatory framework on remittances does not inhibit market entry fornew players or limit the development of new remittance products. The basic requirementsfor entry are registration for MTOs, and registration and licensing for banks. MTOs mustregister with Her Majesty’s Revenue and Customs (HMRC), while banks adhere to regu-lations by the Financial Services Authority (FSA), and are required to register with theBanking Code Standards Board.33

To set up an MTO business, the operator pays a registration fee of £60 per premises tothe HMRC. HMRC reviews the business for the appropriate procedures to control tocounter money laundering and financing terrorism, train staff on antimoney launderingand combating financing of terrorism (AML/CFT), conduct customer due diligence(CDD), and submit suspicious transaction reports (STRs). HMRC provides training tools,which include videos and notice booklets, and conducts onsite supervision. Noncompli-ant businesses receive warnings, follow-up visits, and possible penalties.

Before a bank can get its license, the FSA conducts both onsite and offsite supervisionto ensure compliance with various requirements, including AML/CFT. The FSA risk assess-ments of firms consider money service businesses (MSB) activities if they are “material,” thatis, if they account for more than 10 percent of the business or have particular strategicimportance or risk. The UK Financial Intelligence Unit has reorganized to form a newagency, the Serious Organized Crime Agency (SOCA), which will implement the government’sdrive against money laundering.34

As part of their CDD procedures and AML/CFT requirements, banks ask potentialcustomers for numerous documents, including an identification, such as a passport, and


32. World Bank BRCA Team interviews with the CBN, Abuja, March 2006. 33. According to FATF Special Recommendation VI, all funds transfer systems (formal and informal)

should be licensed or registered with governing authorities. Of course, mere licensing or registration doesnot mean that a system is supervised in the same way as institutions in the regulated financial sector.According to the June 2003 Financial Action Task Force (FATF) International Best Practices Paper, licens-ing implies that the regulatory body has inspected and sanctioned the particular operator to conduct suchbusiness. Registration means that the operator simply has been entered into the regulator’s list of opera-tions. The FATF “is an inter-governmental body whose purpose is the development and promotion ofpolicies, both at national and international levels, to combat money laundering and terrorist financing.”www. faft-gafi.org

34. Burns 2005. SOCA is an Executive Non-Departmental Public body that is sponsored by, but oper-ationally independent from the UK Parliament. It is formed from the combination of various agenciesincluding the former National Crime Intelligence Service (NCIS). www.soca.gov.uk/aboutUs/index.html

proof of address. Although many UK residents have bank accounts, approximately 3 mil-lion adults do not. They include the retired, low-income wage earners, and part-time work-ers paid in cash.35 Often it is necessary, in addition to having personal I.D. such as passportsand driving licenses, to have a proof of residence such as a utility bill (Shah 2005). Becauseof these regulations, persons who are not of legal status in the UK or for some other rea-son cannot produce acceptable I.D. have reduced access to formal financial services.

Some banks interviewed in the UK do not conduct business with smaller MTOs thatmay present ML and FT risks. Recently, some MTOs’ corresponding bank accounts wereclosed due to the perception that MTOs are high-risk business entities that require addi-tional monitoring of transactions. This situation, which is occurring in other major remit-tance sending countries,36 is one of the issues driving the development of the UK MoneyTransfer Association (Box 4).

Banks are not comfortable with the level of regulation for MTOs because it does notinclude a “fit and proper” test, and the penalties for noncompliance are light.37 Currently,


Figure 6. Typology for UK Risk-based Approach to AML/CFT

Source: FATF Typologies Report 2005; Figure 5, UK Risk Assessment.

The UK employs a risked-based approach to implement AML/CFT regulations thatconsiders the institutional type and services offered.

Higher risk

Medium risk

Lower risk

IndicatorsFalse identitiesSmurffingMultiple low-volumetransactions

High cash volumesCovert transactionsMigrant remittancesDisguising moneyLaunderingCash-pooling accountsused

No identificationNo KYCLimited ability tohandle cash

Cash couriers Covert ARS set upto launder money

Shop front registered

Covert

National Franchised ARSMultinational Franchised ARS

35. Shaw 2005. The number of Nigerians with Bank accounts is not known. 36. According to Orozco (2006) in 2006 Bank of America decided to cancel all its accounts with

MTOs, including those with larger international franchises, such as MoneyGram and Western Union. 37. The highest penalty is £ 5,000 for a MTO that is registered and breaches regulations.

the UK has initiated a consultative process for the Payment Services Directive adopted inDecember 2005 by the European Commission (EC). The Payment Services Directive aimsto improve the competitiveness of the EU through integrating national payment marketsand providing support for the European payment industry in building the infrastructurenecessary for a single payment market (Box 5).


Box 3: Requirements for Opening a Bank Account in the UK

To open a bank account in the UK, citizens need to provide either a passport or some form ofidentification and a utility bill with the home address. Other nationals, including Nigerians, needto provide a valid full passport. Where applicable, visas need to be current. If the Nigerian nation-als live in the UK, that is. working or studying, a letter from a known employer or known univer-sity or college confirming their address is needed. It is difficult for banks to verify addresses of theapplicants who reside in Nigeria. Although most Nigerian nationals living in the UK generally donot need to be classified, account holders intending to send and/or receive transactions fromNigeria, and Politically Exposed Person (PEPs) often do need to be classified. Agreement to openthe account for classified customers may require senior approval.

Source: World Bank interviews with UK banks, April 2005.

Box 4: UK Money Transmitters Association

The UK Money Transmitters Association (MTA) has approximately 500 members. It aims to be thevoice of all the many retailers who have registered with Customs and Revenue as money servicebusinesses (MSBs) to make money transfers. The MTA will represent the concerns of retailers whooffer money transfers within the nonbank sector. The association aims to represent fairly thediversity of the businesses registered with HMCR that offer money transfer services. For example,the association will cater to money remitters who provide a service to customers wishing to senda few hundred pounds back to relatives in their countries of origin. Equally, MTA will representthe businesses that offer high-value foreign exchange for customers who may wish to buy prop-erty abroad.

MTA’s key objectives are to:

■ Establish and promote shared high standards across the money transfer industry and estab-lish an industry-wide “quality mark.”

■ Establish and promote “best-practice models” in connection with issues such as effective cus-tomer ID checks, training systems and procedures, suspicious transaction reporting, record-keeping, and audit trails.

■ Provide training, information, and support to money transmitters to help them comply withthe regulations.

■ Engage in dialogue with the regulator to ensure that the 2003 money laundering regulationsare fairly and consistently applied.

■ Establish an effective dialogue with the banks to ensure that they behave reasonably in theirrelations with money transmitters.

■ Be the voice of the industry with national and international government.

Source: www.ukmta.org/.

UK banks report that they have trouble when conducting business with Nigerianbanks.38 UK banks find it difficult to establish corresponding banking relationships withNigerian banks because of challenging Know Your Customer (KYC) procedures of Nigerianbanks’ clients. The UK banks are not confident with the manner in which the Nigerianbanks conduct these procedures.

Consumer protection is accessible in the UK through the financial Ombudsman. The UKfinancial Ombudsman helps to settle individual disputes between consumers and financialfirms. It covers complaints about most financial products and services provided in (or from)the UK. If there are any problems with a transfer, customer assistance is available througha dedicated customer helpdesk or team, general customer services call center, or contactwith a branch or an agent. Some providers, mainly UK banks, offer a complaints procedure.

UK Government Initiatives on Remittances

DfID is initiating Remittance Country Partnerships (RCPs) with selected countries,namely, Bangladesh, Ghana, and Nigeria, all of which receive large volumes of remittancetransfers from the UK. These partnerships include a range of measures to remove imped-iments to remittance flows, improve access, and the terms of that access, for low-incomeand rural people to remittances and other financial services in both sending and receiving


Box 5: EU Payments Directive: New Legal Framework for Paymentsin the Internal Market

The European Commission's key aim with the new Payments Directive is to facilitate the creationof a Single European Payments Area (SEPA). With the introduction of the Euro, the commissionsees this as an important political priority.

However, the directive also will significantly affect money remitters by creating the possibility ofa license for them to operate EU-wide. This license could substantially benefit larger companies.In terms of regulation, in many EU member states, this license would constitute a reduction inentry barriers from the current regime, which requires a banking license to offer remittance ser-vices. Currently, in the UK, money remitters are not subject to financial regulation, although theyhave to comply with anti-money-laundering requirements. The directive is likely to mean aslightly higher level of regulation in the UK. The precise level will depend on the outcome of nego-tiations in the European Parliament and Council of Ministers once the EC has adopted a legisla-tive proposal for the directive.

The UK government has been seeking to ensure that the regime introduced by the directive is pro-portionate to the risks of providing payment services, which are not equivalent to the risks of tak-ing deposits. The directive is also likely to contain a waiver that will give Member States the optionto exempt small remitters from the license requirement. However, even if they are waived, smallremitters will still have to comply with requirements regarding information given to customers,execution of payments, and liability.

The directive is likely to take effect in 2008.

Source: HM Treasury.

38. World Bank BRCA Team interviews with commercial banks in the UK, April 2005.

countries. The partnerships also strengthen the capacity of the financial sector to provideefficient and widespread transfer payment services. DfID together with other UK partnersconducted a UK Remittance Product Survey, which provides comparable and accessibleinformation on products and services to remittance senders (Box 6).

Initiative with Nigeria

The goal of DfID’s proposed RCP with the Nigerian government is to reduce the transac-tion costs and barriers to access for Nigerian remittance senders and recipients. The RCPwould enhance competition, improve transparency, address legal and policy constraints toremittance flows in the UK and Nigeria, promote the use of technology, and build thecapacity of Nigerian remittance-receiving institutions (Shah 2005). The RCP also aims toencourage easy and inexpensive access of financial services to low-income people. The RCPalso aims to encourage a higher level of involvement of banks, NGOs, nonbank financial


Box 6: Sending Money Home? Initiative

In 2004 DFID and the Banking Codes Standards Board (BCSB) conducted the UK Remittance Prod-ucts Survey entitled, “Sending Money Home?” as a significant first step toward achieving trans-parency and reduction of costs of remittances originating from the UK. The study providescomparable and accessible information on the products and services available to people want-ing to send money home from the UK to developing countries.1 This information is web based(www.sendmoneyhome.org) and leaflet based, available in relevant languages.

The publication hopes to increase transparency on remittance service issues such as costs, speedof transfer, and the customer services that banks, building societies, and MTOs offer. The hope isthat making this information public will encourage competition and innovations within themoney transfer market to developing countries and help remitters make better choices. This pub-lication provides information for the corridors between the UK and Bangladesh, China, Ghana,India, Kenya, and Nigeria, and will be extended to an additional nine countries. Selection factorsinclude the size of the migrant groups in the UK and the economic situation in the countries.

To accurately represent the costs, available remittance products, and customers’ knowledge andpractices when sending remittances from the UK, the research methodology involved a survey ofremittance providers; qualitative research among the members of the different migrant groups;and mystery shopping at remittance provider outlets such as MTOs, banks, and building societies.The Sending Money Home Initiative encourages the use of formal channels through providinginformation on the costs, speed, and security that the customer can expect from these channels.

The study found out that, when sending money via MTOs, prices ranged from 5 percent to 12 per-cent for sending £100, and from 4 percent to 6 percent for £500. Below certain thresholdamounts, no identification is required to transfer funds through MTOs. However, these amountstend to be lower for MTOs, that is, MTOs’ requirements could sometimes be more stringent andthere is a variation in the minimum amounts requiring ID-based on the MTO. According to theDFID study, “Sending Money Home,” MoneyGram and First Remit require ID for anything over£500; Travelex and Western Union over £600; NatWest and RBS £1000; Chequepoint £1900; andExpress Funds, a Ghanaian MTO, £2000.

“Sending Money Home” also surveyed banks, including those active in the UK-Nigeria remittancescorridor. Banks that contributed to the survey included Abbey, Barclays, Citibank, NBOS, Co-operative,HSBC, Nationwide, Lloyds, TSB, NatWest, and Royal Bank of Scotland (RBS). Although often moreexpensive and slower than MTOs, banks tend to offer more competitive prices for transferringamounts over £500.

Sources: World Bank and DFID 2005.

institutions such as mortgage and savings institutions, and institutions that serve low-income people in the remittance market.

DfID is working with the CBN to improve data collection capacity and on a range ofother financial sector issues such as facilitating banks to develop corresponding bankingproducts. DfID is collaborating with the CBN to develop a household survey to enable theprivate sector to understand how low-income people use their money. This informationwill be useful for developing products for the Nigerian financial market. DfID also is devel-oping a matching grant scheme to support the financial sector for remittance products.DfID packages a variety of financial sector initiatives by using existing instruments andintroducing remittances as a crosscutting issue.

Main Findings in the First Mile

There is a Need for New Transfer Mechanisms that Respond to the Demands of the NigerianDiaspora. After over five decades of migration, the UK Nigerian population is established,diverse, highly-educated, and professional. These Nigerians are a potential consumergroup for specialized remittance banking products. The characteristics of the Nigeriancommunity would seem to correlate ideally with a high preference for formal funds trans-fer systems. However, research indicates within the diaspora an equal prevalence of infor-mal transfers to formal systems. Nigerian migrants who do not have legal immigrationstatus and have a lower level of education than the vast majority, or who are not aware ofthe various remittance and banking products, may have limited access to formal financialinstitutions.

An enabling regulatory environment for RSPs does not guarantee participation in theremittance market. The legal and regulatory framework affecting remittance transactionsin the UK does not inhibit market entry for new MTOs or limit the ability of banks todevelop new products. However, Nigeria’s AML/CFT history has drawn higher scrutinyfor transactions and deters banks’ involvement in the remittance market. Therefore, fewerinternational banks are interested in developing specialized remittance products withNigerian banks. UK banks seemingly prefer more stringent regulations for MTOs, a few ofwhich they consider to be of high risk for ML and FT.

Development of remittance corridors toward higher formality requires governments’interventions through effective policies and bilateral initiatives. The UK government hastaken positive steps to promote formal transfer mechanisms and reduce transaction costsand barriers to access for remittance senders. In partnership with the Nigerian govern-ment, DfID is developing initiatives to reduce the cost of remittances and enhance theimpact of these flows in the lives of the recipients. The proposed remittance countrypartnership (RCP) between the UK and Nigeria could facilitate the introduction of moreremittance products, thereby increasing competition, improving transparency, influ-encing policy by addressing legal constraints to remittance flows between the UK andNigeria, promoting the use of technology to develop innovative products, and buildingthe capacity of the remittance-receiving institutions in Nigeria. However, the success ofthese initiatives depends on the commitment of both governments to develop effectivepolices.


CHAPTER 2

At the Intermediary Stage

This chapter describes the current formal and informal payments infrastructure forremittances in the UK-Nigeria remittance corridor. It touches on key issues specificto this corridor such as the dominance of MTOs and banks with MTO arrangements,

the cost structure of formal transfers, the presence of informal transfer intermediaries,and the potential for remittance products that leverage new technologies.

Remittance Transfers through Formal Intermediaries

MTOs and banks capture funds at the origination while banks with MTO partnershipsdominate the distribution. Remitters prefer MTOs because of reliability, speed, accessibility,and a more flexible customer identification process.39 MTO transfers take less than 24 hours,while corresponding bank transfers take 2–10 days. Figure 7 describes the origination anddistribution options available in the UK-Nigeria Corridor regardless of their settlementprocess.

21

39. As in most remittance transactions, when the remittance transaction is initiated, the sender paysall fees charged by MTOs. In most instances, transaction and exchange fees are applicable. The transactionfee charged to the customer is split with the bank agent in Nigeria. The potential exchange fee is the sourceof most of the profit made by MTOs.

Origination

Remittance transfers from the UK to Nigeria originate mainly through MTOs, and pri-marily in cash through face-to-face transactions.40 MTO services are sometimes availableonline and by telephone. It is not necessary to have a bank account in the UK or in therecipient country to use MTO services.41

MTOs and banks require identification for money transfers above a certain threshold,which varies from provider to provider. Bank transfers to Nigeria can occur throughaccount-to-account, telegraphic, via Foreign Exchange house, and banker’s draft (Box 7).

Messaging

Communication between the capturing agents in the UK and the disbursement agents isthrough email. In Nigeria, the central offices electronically transmit the information to the


Figure 7. Channels for Origination in the UK and Distribution in Nigeria

Source: World Bank.

Originationin the UK RSPs

Distributionin Nigeria

Correspondent Banks

Western Union

MoneyGram

Chequepoint

First Remit

Travelex MoneyTransfer

Other small MTOs

Relatives/Friends

25

Banks

Branches

Over 3,000 branches

Postal servicesNetpost

955 post offices andover 3,000 agents.

IFT systems

Hand delivery

Cash from in - Kind good

4,000

2,688

270

250

125

40. www.sendmoneyhome.org/Country percent20summaries/Nigeria.html41. www.sendmoneyhome.org/Country percent20summaries/Nigeria.html

outlets. Information sent to the disbursement agent includes the name of the beneficiary,the amount, and the instruction to pay in Naira or foreign currency. The sender tells thebeneficiary the transaction code, usually by a call to a mobile phone.

Settlement

The MTO makes a credit transfer from its bank account in the UK to its account with theNigerian disbursing bank in the UK or the United States. With MTOs operating instanttransfers, the settlement takes place the next day or within 3–4 days. The other methodscould take 2–3 weeks, but in most cases, the average is one week.

Credit and Liquidity Risks

The banks in Nigeria assume a credit risk because they often disburse funds and wait for1–3 weeks before they settle their accounts with the MTOs. Banks use the spread that theygain on foreign exchange transactions, called float trade, between the period of disburse-ment and settlement to compensate for the credit risks that they assume. This risk will varydepending on the agreement with the MTOs working with the banks, amounts disbursed,and time of the year.


Box 7: Bank Transfer Systems in the UK-Nigeria Remittance Corridor

Account to account transfer. The originator instructs her or his bank to make an electronic trans-fer of funds to the bank account of a beneficiary in Nigeria. This transfer can take 24–48 hoursfrom initiation in the sending country to action in Nigeria, and an additional 24–72 hours to com-plete the domestic leg of the transaction. Although expensive, electronic account-to-account isthe most secure means of international transfer. The fees are charged to the sender’s account ordeducted from the principal. The currency conversion takes place at the retail end of the trans-action, from which the recipient picks up the money.

Telegraphic transfer. The process is the same as above, except that the beneficiary does not holdan account with the receiving branch and is therefore required to visit the branch and collect cashupon production of suitable identification. The term, “telegraphic transfer” is a legacy of telex-based systems. While this method is still in use in smaller banks and institutions, the standardmedium for such traffic today is the global interbank SWIFT network.

Transfer via a foreign exchange (FX) house. The originator visits a FX house, pays cash over thecounter, and issues his instruction. The FX house converts the currency to Naira and issues a pay-ment instruction to a bank in Nigeria. The FX house will send electronic messages to a bank withwhich it has a bilateral or corresponding agreement. Once the bank in Nigeria receives the instruc-tion, the money is paid into the recipient’s account, or paid out to a non-bank-account holderupon presentation of suitable ID. The FX house may or may not make a transaction charge butwill use a retail rate of exchange as its prime source of revenue.

Bankers’ draft. The originator instructs her bank to issue a bankers' draft, and mails it directly tothe beneficiary in Nigeria. The beneficiary submits the draft over the counter at her local bankbranch, and the bank submits it through clearing channels for settlement. Once the bank receivesthe proceeds, they are credited to the beneficiary's account. As the transaction relies on paperfrom end to end, it is by far the slowest means of payment, and carries relatively high risks of lossand delay, among other concerns. It should be noted that in many developed countries, to steerclients toward using the more automated and efficient electronic products, banks are raisingcharges for drafts.

Sources: World Bank BRCA Team 2006, DFID RCP Report 2005b.

In the case of remittances paid in local currency, the banks’ liquidity depends on thecash deposits made during the day and the branch reserves. Banks need to advance hardcurrency to branches based on the branches’ estimates of demand. These estimates arebased on historic patterns, nature of branches (urban vs. rural), and frequency of transac-tions. Some banks provide hard currency reserves to cover three days and some for approx-imately one month, depending on the needs of the branch.

Disbursement

To receive the funds, the beneficiary provides the code and identification to the disburse-ment agent. Identification documents used in Nigeria to collect remittances include dri-ver’s license, international passport, and identification of individuals by a recognizedauthority in the absence of formal I.D. Box 8 illustrates the transfer process from origina-tion to disbursement.

Remittance Transfers through Informal Intermediaries

Informal intermediaries are prevalent in this corridor. The most common methods includepeople carrying cash, community or ethnic networks, trader networks, value transfers, andbus couriers. For emergencies, the tendency is to use formal channels, such as banks andMTOs.42 IFTs that involve the physical transfer of cash on behalf of friends and relativesusually are free and reliable, and serve a social function.

Persons Carrying Cash

The most common method of transferring money is physical cash through friends andfamily or through persons known to friends and family. This method of sending money isusually free and depends on the trustworthiness, integrity, and reputation of the courier.This method is declining in some communities because of trust issues. Sometimes, sendersexpress their gratitude through gifts like a shirt or a bottle of wine to the person carryingcash instead of paying a fee. The sender informs the recipient that money has been sent andprovides the name and contact information of the traveler. The recipient contacts the trav-eler and collects the money.

Most of these remittances seem to be for legitimate purposes. However, the formerpresent some concern for authorities with regard to ML and FT. FATF special recommen-dation IX requires that travelers physically carrying cash declare amounts exceeding a pre-set maximum threshold of US$15,000. According to government officials in Nigeria, thereare no restrictions on the amount of money brought physically into the country. Instead,there is a requirement to declare amounts of US$10,000 or more at the port of entry. Com-pliance with this requirement is low to nonexistent.


42. BRCA Team interviews with Economic and Financial Crimes Commission (EFCC), Nigeria,March 2006.


Box 8: Most Common Remittance Transfer Process from the UK to Nigeria

MTOs are the most common RSPs used in the UK for remittance transfer to Nigeria. Banks in Nigeriadominate the distribution of these flows. The following figure illustrates the process from originationto final conversion into Nigerian Naira.

Source: World Bank interviews.

1. Remittance senders in UK have access to an extensive network of MTOs’ outlets. Most MTOremittance transfers are originated in cash.

2. Sender presents documents for identification and provides beneficiary’s information. Agentprovides sender with transaction code.

3. Capturing agent sends remittance transfer information to disbursing agent containing name ofbeneficiary, amount, which in Nigeria could be paid in local or foreign currency.

4. Sender informs beneficiary of transaction code, usually done by call to a mobile cell-phone.

5. Credit transfer is made by MTO from its bank account in UK to a bank account of Nigerian dis-bursing bank in UK or US. With most MTOs, settlement is conducted next day. MoneyGram takes2–3 business days.

6. Banks’ liquidity is supported by cash deposit made during day.

7. Credit risks assumed by banks are compensated by spread they gain on foreign exchange dealings.

8. Beneficiary provides code and identifies to receive funds.9. If beneficiary receives remittance in foreign currency, amount could be exchanged at bank at

interbank rate or s/he could change amount at BDC at a more favorable rate.

MTO’s bankaccount

MTO agent

Sender

Nigerian bankAccount

Bank branch oragent

Beneficiary

Bank

UK Settlement Nigeria

Transmission of information / messaging

Transfer of funds

BDC

1 2

3

4

5

6

7 8

9

GBP

USD

NGN

GBPUSDEURNGN

Community Networks

Some agents operating within communities bundle remittance payments and sendthem to their corresponding agents in Nigeria, who distribute them to the relevant ben-eficiaries. The precise nature of these networks has not been established. It is not knownwhether the arrangement has no physical movement of cash and therefore includes an

exchange facility; or whether the hard cash is physically taken back to Nigeria, such asan informal courier service.

Trader Networks

Some remittance inflows occur through trader networks, such as second-hand car traders.Unlike Hundi or Hawala networks, this method does not appear to be “institutionalized.”No data is available to assess its significance or scale, the extent of its use, and whether it islinked to smuggling activity. Arguably, if there are significant inflows of cash throughtrader networks, or other informal money transfer networks, for these informal methodsto function, there must be corresponding outflows from Nigeria. The fact that money out-flows from Nigeria are legally restricted would strengthen the argument that businesses,investors, and consumers would use informal methods to send out money.

Value Transfer

This is a system of settling accounts without the physical transfer of cash. This system is on therise and involves Sender A in the UK paying money to a contact in the UK, who informs a busi-nessperson in Nigeria of the account credit, and the businessperson pays the beneficiary inNigeria. The settlement of these accounts sometimes occurs through car dealers who importcars, sell them in Nigeria, and repay the remittance to the businessperson at an agreed rate.This method proliferates mainly in the Italy-Nigeria remittance corridor, in which the pres-ence of undocumented Nigerian immigrants is increasing rapidly. This method has securityimplications because of its basic informal nature, which creates a potential for robbery of thebusinessperson. Since it is a home business, it is usually associated with high traffic to theprovider’s house. Sometimes, instead of sending money home to Nigeria for the recipient topurchase food, a sender could approach a contact in the UK to facilitate a value transfer. Thesender pays Businessperson A in UK a certain amount equal in value to the food. Businessper-son B in Nigeria buys and delivers food to the recipient equal in value to the amount paid bythe sender, minus the fees charged for the transaction. There is no information on how thetwo businesspersons settle their accounts. This method is useful for beneficiaries who are ill ordisabled and not able to carry out daily functions.

Bus Courier

Local bus couriers play a role in the distribution of international funds. Research con-ducted in Lagos shows that this is a common method to transfer money if individuals can-not travel to and from the large cities to collect the money. The initial recipient of theinternational remittance can visit an interstate bus terminus in Lagos and pay a fee to sendan envelope of money to a bus terminal in another state. The sender writes the name of thefinal recipient, and the required delivery information, on the envelope. To collect themoney, the recipient must visit the bus station and provide a means of identification.

Costs Associated with Formal Transfers

The cost of sending money from the UK depends on the transfer method (Table 2). Ser-vices offered by MTOs are the cheapest for transferring money from the UK to Nigeria.



43. BRCA Team interviews with EFCC, Nigeria, March 2006.

Table 2. Remittance Transfer Fee from UK to Nigeria, May 2005

(£)

Transfer method Remittance provider Remittance cost

Cash transfer First Remit 5

Chequepoint 5

MoneyGram 7

Travelex Money Transfer 7.5

Western Union 12

Bank draft Chequepoint 5

HBOS 7

NatWest 8

Royal Bank of Scotland 8

Nationwide 12

Co-operative 13

Barclays 15

HSBC 15

Loyalty card Travelex Money Transfer 7.13

International money order Barclays 8

Electronic/SWIFT Co-operative 13

HBOS 14

NatWest 18

Royal Bank of Scotland 18

Barclays 20

Nationwide 20

Lloyds TSB 20

HSBC 21

Abbey 25

Citibank 30

Priority Electronic/SWIFT Barclays 35

Notes:1. Some companies require a minimum amount through their services.2. Average cost of sending to Nigeria GB£ 100 using different remittance service providers.Source: DFID 2005a.

The average transaction ranges from US$100–500. In contrast, during peak periods (Hajjand Christmas), transactions range from US$1,500–3,000.43

According to the DfID study, sending money via MTOs prices ranged from 5 percentto 12 percent for £100, and from 4 percent to 6 percent for £500 (Figure 8). The sender

covers the financial costs involved in the remittance transfer. The recipient may incur othercosts, such as transportation to the disbursement agents, that are not currently possible tomeasure. The recipient does not need to pay any fees to the bank acting as the MTOs’ agentin Nigeria. Since 2001, the Nigerian government has asked banks to pay beneficiaries inhard currency if requested.44

Remittance recipients have the option of exchanging the money they receive througha BDC, from which they get a higher foreign exchange (FX) rate than the CBN rate usedby banks. The beneficiaries may receive remittances either in foreign currency-U.S. dol-lars, Euros, British Pounds, the CFA45 francs—or in Nigerian Naira ( ). Although avail-ability is not always guaranteed, the foreign currency option for remittances also isavailable to people in rural areas. This policy has encouraged more people to use formalinstitutions to transfer money from the UK, rather than informal operators. BDCs chargea service fee of 1 percent of the exchanged amount or 1, whichever is higher. The com-mission accords with the instructions from CBN.46 Some BDCs are concerned that theCBN commission ceiling limits the ability to profit from the transactions.47


44. The rationale for this directive is to stop the exploitation of beneficiaries by banks and to promoteincreased inflow of foreign exchange through formal channels.

45. Franc de la Communauté financière de l’Afrique is the currency used by Benin, Burkina Faso, Côted’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, Togo, Cameroon, Central African Republic, Chad, Republicof Congo, Equatorial Guinea, and Gabon.

46. World Bank BRCA Team interviews with Specifique Resources Ltd, Abuja, May 2005.47. World Bank BRCA Team interviews, Abuja, May 2005.

Figure 8. MTOs Retail Prices for Sending Money from UK to Nigeria, April 2004

Note: This figure shows only transfer fees, rather than total costs. Exchange rates costs are not included.Source: DFID 2005a.

Western Union

Travelex

MoneyGram

First Remit

Chequepoint

MTO

s

Fees (GB£)

0 5 10 15 20 25 30 35

GB£ 500 GB£ 100

N

N

The amount of remittance dis-bursed into Naira by banks is declin-ing as their cost to pay remittances inhard currency is increasing. There arethree possible exchange rates in Nigeria:CBN or Inter-bank Foreign ExchangeMarket/Dutch Auction System (IFEM/DAS) rate, BDC rate, and black mar-ket rate. The difference between theBDC and black market rate is small and continues to shrink. It is expensive for banks topay remittances in hard currency. Besides the cost of stocking hard currency specifically topay out remittances, there are transportation costs and security costs (Table 3).

Often banks need to transfer funds by road from cities and to branches in remoteareas, and guards are necessary for the safety of staff and funds.48 The tendency is forrecipients to take their remittances from the bank agent in hard currency and exchangethem at a BDC. Banks will continue to lose money-exchange business for remittancefunds unless they begin to offer exchange rates comparable to those offered by the BDCs(Table 4).

Profit Equation for RSPs Involved in the Corridor

Banks and MTOs in the UK rely on transfer fees and volumes of transactions to makeprofit. The need to maintain a certain volume of transactions is the underlying reasonfor exclusivity conditions for banks in Nigeria that are agents of MTOs in the UK.49

Banks in Nigeria that enter into an agreement with a MTO in the UK receive a certainpercentage of the commission charged by the MTO to the sender. The commissionreceived by the bank is 25–35 percent of the fee charged.50 In addition, the bank has theopportunity to cross-sell other banking products, such as savings accounts, to the indi-viduals collecting remittances. Many banks (agents of MTOs) have stated that, sincebecoming agents, they have seen a rise in the use of retail banking products by remit-tance beneficiaries. There is no data available to show this increase and the associatedproducts (Shah 2005).

Banks are losing potential account holders because they cannot offer exchange ratesas attractive as the BDCs’. Some Nigerian banks’ interest in the remittance market is forthe commission alone, not as a link to other financial products. So far, only one bank islooking at remittances as a path for providing services such as saving accounts, credit, orinsurance, thus transforming remittance customers into bank clients. Some banks are try-ing to increase their aggregate volume of remittances through their MTOs partnerships,


48. Interview with commercial bank agent in Lagos. 49. Exclusivity contracts occur when, as a condition of being able to offer a specific remittance service,

an RSP or agent is prohibited by the MTO from offering any other remittance service associate withanother MTO.

50. World Bank interviews with commercial banks in Lagos.

Table 3. Value of Remittances Exchangedfor Local Currency by Banks,2002–05 (million Naira)

2002 2003 2004 2005

323.60 243.24 200.86 211.74

but the exclusivity of their contractual obligations with MTOs limits their expansion. Atthe same time, to maintain their volume and monopolistic role of distributing remit-tances, some banks do not want to see other entities enter into the business, be they MTOsor BDCs.

Transaction costs have come down in some corridors by 50 percent or more signifi-cantly through promoting competition, innovating payments systems, and increasingaccess to financial services for senders and recipients.51 CBN’s policy of allowing remittancedisbursements on hard currency has the positive impact on transfer costs of reducing theFX spread made by banks and using BDCs to create competition to combat the black mar-ket FX. There is still a relatively high cost of formal transfers associated with this corridor,mainly because of low competition in the distribution of remittances in Nigeria, absenceof innovative payment instruments, and presence of exclusivity contracts between MTOsand Nigerian banks.

Market Opportunity for New Technologies

There is a potential to increase distribution and reduce transfer costs in the corridor bydeveloping telecommunications networks to connect more recipients to formal financialsystems. In most remittance-recipient countries, including Nigeria, lack of good roads,unreliable energy sources, and political issues or conflicts have prevented the wiring nec-essary for basic services such as electricity and telephone landlines. Very fortunately, new


51. An example of this trend is observed in most corridors originated in the U.S with Latin Americancountries. See Orozco 2006.

Table 4. Transfer Cost of £100 from UK to Nigeria

A. Transfer originated at a MTO paid and converted at a bank, £100

Transfer fee Foreign exchange Amount converted Fee for beneficiary Amount received(GBP) rate (Naira) (Naira)

5 130 13,000 0 13,000

B. Transfer originated at a MTO, paid at a bank, and converted at a BDC, £100


5 140 14,000 1 13,999

C. Transfer originated at a bank, paid and converted at a bank, £100


13 130 13,000 0 13,000

Source: World Bank estimates.

technologies are enabling many places to bypass their poor infrastructure and to accessmodern conveniences.52

Given the right conditions, the system of using mobile phones to transfer money inthe Philippines and South Africa could be feasible in Nigeria.53 However, the cost of oper-ation is still high, and there are regulations governing the GSM industry that are impeding


Box 9: Telecommunications Industry in Nigeria

After oil and gas, telecommunications is the fastest growing industry in Nigeria. It had a growthrate of 240 percent in 2004. The Global System for Mobile communications (GSM) industry in Nigeriais about four years old. The penetration of fixed lines is very low; in 2002, the number of maintelephone lines was five per 1000 inhabitants and there is a large mobile phone market waitingto be tapped. In early 2006, Nigeria had approximately 18 million cellphones with 15 million sub-scribers. The four main players in the industry are Mobile Telephone Networks (MTN), Glo-Mobile,M-TEL, and V-mobile. MTN has the largest subscriber base, followed by Glo-Mobile. MTN Nigeriawas created in August 2001 to construct, own, maintain, and operate a GSM cellular telecommu-nications network in Nigeria. In 2002 MTN Nigeria received a US$100 million loan from the Inter-national Finance Corporation (IFC) to expand the coverage and capacity of its network and therebyprovide the infrastructure for the rapidly increasing number of its subscribers.

GSM Costs

The cost of communication for the subscriber remains high, approximately 40, or 31 cents perminute. (The current bank exchange rate is US$1 = 128 Naira.) The ideal subscription rate would be

14–18 per minute, or 11–14 cents per minute. Interconnection fees are very expensive at 15. Thehigh cost of services results from a lack of infrastructure, unreliable power supply, multiple-taxation,and multiple regulations. Cell power sites run 24 hours on generators, which run on diesel fuel, andrequire round-the-clock security. The poor condition of many roads makes transportation difficult,especially to remote areas. Industry operators often have to establish proprietary networks and sep-arate networks for power supply and transmission to mitigate infrastructural and operational effi-ciencies. In Lagos, companies are beginning to share cell power sites, so costs are coming down.

NCC

The Nigerian Communication Commission (NCC) regulates the telecommunications market. Theindustry is highly regulated and heavily taxed, with GSM providers paying about 3 billion intaxes to operate a cell tower. The Consumer Protection Council in Nigeria charges GSM providersa fee equivalent to 10 percent of their promotions. The current regulatory environment createsbusiness barriers for GSM providers who want to become remittance market players. It is possi-ble for some GSM subscribers to check their account balances with their phones. Given the phe-nomenal increase in mobile technology and the innovative uses of mobiles in rural areas,mobile-to-mobile money transfer is being thought of as the future for remittance channels. Thistechnology is taking off in different countries, for example, SMART Padala in the Philippines.

Sources: 1. World Bank interviews with telecommunications companies in Nigeria, March 2006.2. The Economist Intelligence Unit 2005.3. Smart Communication, Inc. 2006.

52. According to Gwin (2005), 70 percent of Africa’s phone subscribers is connected via cellularphones. Africans are turning to technology for more than just talk. For example, many bank customersin Nairobi use cell phones to monitor their accounts via text messaging.

53. BRCA Team interviews with telecommunications companies and USAID Nigeria.

N

N

N

N

its development. It is possible to use mobile phones to facilitate remittances informally;however, there is no information explaining how the system works or its potential for abuseby criminals.54 The challenge is how to take advantage of these various technologies andadapt them in a way that is feasible for this corridor.

Payments Systems

The UK has a developed payments system, whereas Nigeria has a developing payments systemwith a predominantly cash economy. The difference in payments systems infrastructurebetween the origination and distribution makes formal transfers more problematic, especiallyfor bank transfers that rely on correspondent bank partnerships. A sophisticated structure,the UK payments system links to 15 European Union banking systems and the Society forWorldwide Interbank Financial Telecommunication (SWIFT). On the other hand, Nigeria’sextensive use of cash and its large informal economy creates a dual payments system thatexhibits features of both developed and rudimentary payments mechanisms. The recentlyreleased General Principles for International Remittance Systems is intended to guide thedevelopment of remittance markets worldwide (Box 10).

Payments Systems Infrastructure in the UK

In 2002 clearing systems in the UK processed over 5 billion clearing transactions, valuedat £86,025 billion (OFT 2003). The payments systems have two broad classifications: clear-ing schemes and plastic card networks. Clearing schemes include Bankers’ AutomatedClearing Services (BACS), Check and Credit Clearing Company (CCL), and real time grosssettlement (RTGS), cleared by the Clearing House Automated Payment Scheme (CHAPS).The plastic card networks cover debit, credit, and ATM cards. CHAPS Euro, established in1999, enables its members to make large payments in Euros across the UK. Through theTrans-European Automated Real-Time Gross Settlement Express Transfer (TARGET sys-tem), CHAPS Euro can facilitate cross-border payments in euro to the 15 European Unionbanking systems (Box 11).

Payments Systems Infrastructure in Nigeria

The use of physical cash is at the core of the Nigerian payments systems because trans-actions take place in a cash economy. Although the use of checks is increasing signifi-cantly, cash is still the preferred method of settling payments in Nigeria. The incidenceof financial sector distress that became pervasive in the late 1980s further eroded pub-lic confidence in the banks, and seriously jeopardized the smooth operations of pay-ments systems (Nnanna and Ajayi 2005). The key payment instruments available inNigeria are cash, checks, electronic funds transfer (EFT), and plastic money cards(Table 5).


54. BRCA interview with USAID Nigeria.

E-payments and Plastic Money

The e-payments system is still evolving. Nigeria is part of the SWIFT network. NetPost-Nigeria offers two e-payment services55:

Money Transfer: Works with Western Union to transfer money to remote parts ofNigeria.


Box 10: CPSS/World Bank Task Force for General Principles on InternationalRemittance Systems

The leading forum for international cooperation and policy development in payment systemsis the Bank for International Settlements’ Committee for Payment and Settlement Systems(CPSS). At the same time, over the last 10 years, the World Bank has accrued considerable expe-rience in formulating such policy and supporting the reform of payment systems in more than65 countries.

At the end of 2004, the World Bank and the CPSS convened a task force to address the needs ofinternational policy coordination for remittance systems.1 The task force has issued the consul-tative version of General Principles for International Remittance Systems. The main objective of theGeneral Principles is to guide the formation of a competitive and sound remittances marketthrough which remittance services can be offered safely and efficiently, and at the lowest possi-ble cost.

The General Principles are expected to become the fundamental framework and key point of ref-erence for authorities, other stakeholders, and other international organizations. In particular,public authorities should evaluate what action to take to achieve the public policy objectivethrough implementation of the General Principles, while remittance service providers should par-ticipate actively in the implementation of these principles.

The five General Principles are:

1. Transparency and consumer protection. The market for remittances should betransparent and have adequate consumer protection.

2. Payment system infrastructure. Improvements to payment system infrastructurethat have the potential to increase the efficiency of remittance services should beencouraged.

3. Legal and regulatory environment. Remittance services should be supported by asound, predictable, nondiscriminatory, and proportionate legal and regulatoryframework in relevant jurisdictions.

4. Market structure and competition. Competitive market conditions, includingappropriate access to domestic payments infrastructure, should be fostered in theremittance industry.

5. Governance and risk management. Remittance services should be supported byappropriate governance and risk management practices.

Source: Committee on Payment and Settlement Systems and World Bank 2006.Note: 1 The WB cochairs this task force with the CPSS. Other task force members include the ADB; AMF;IADB; IMF; central banks of Brazil, Germany, Italy, Mexico, Philippines, Sri Lanka, and Turkey; Hong KongMonetary Authority; European Central Bank; Federal Reserve Bank of New York; and the Board of Gov-ernors of the U.S. Federal Reserve System.

55. www.netpostnigeria.com/services.html


Table 5. Key Payment Instruments in Nigeria

Paymentinstruments Key features

Cash Used for 80–90% of transactions. Nigeria has 545.8 billion (approximatelyUS$4.1 billion) in circulation.

Checks Large-value transactions are usually check based.

Electronic funds New product introduced to facilitate electronic transactions. They can betransfer (EFT) retail,as in the Nigerian Electronic Funds Transfer (NEFT); or wholesale,

as in the Nigeria Interbank Settlement System (NIBSS) Fast Funds.

Plastic money E-purse (Valucard), debit (ATM cards), and credit cards, such as MasterCard.Nearly 12,000 debit (ATM) cards have been issued in Nigeria, but only 8,000are active.

Source: Nnanna and Ajayi 2005.

Box 11: TARGET and SWIFT Payments Systems

TARGET is the real-time gross settlement system for the euro. It is a decentralized system con-sisting of 15 national (RTGS) systems (CHAPS for the UK), the European Central Bank (ECB) paymentmechanism (EPM), and the Interlinking system. The Interlinking system is a telecommunicationsnetwork linking the national RTGS systems and the EPM.

Cross-border TARGET payments are processed via the national RTGS systems and exchangeddirectly on a bilateral basis between national central banks (NCBs). Given this, TARGET incorpo-rates RTGS systems, which have been established under local conditions. The payment servicesoffered to the final customers of different national systems are not identical. The Interlinking pro-cedures, however, are the same for all countries.

To initiate a cross-border payment, the paying bank sends a payment message to the NCB throughits RTGS system. The sending NCB checks the validity of the payment and the availability of suffi-cient funds. The amount of the payment is then debited irrevocably and instantaneously fromthe RTGS account of the sending bank and credited to the Interlinking account of the receivingNCB in the ECB. As soon as the receiving NCB receives the payment message, it checks the secu-rity features and verifies that the receiving bank is a member in its domestic RTGS system.

If so, the receiving NCB converts, when appropriate, the message from the Interlinking standardinto the domestic standard. It then credits the receiving RTGS account and delivers a positiveacknowledgement to the sending NCB/ECB. Finally, the receiving NCB sends the payment mes-sage through the local RTGS system to the receiving bank.

All TARGET messages are submitted to the Society for Worldwide Interbank Financial Telecom-munication (SWIFT) network. SWIFT is the industry-owned cooperative that supplies secure mes-saging services and interface software to 7,000 financial institutions in 198 countries. Messagingtraffic increased by 18.5 percent in 2002 with 1.8 billion messages transmitted. Due to the net-work effects of messaging standards, the increased usage has put SWIFT in a strong position forfuture market growth.

Sources: Office of Fair Trading 2003, www.swift.com

N

PostCash: Makes it easier to send money from anywhere in the country to any town,village, or city in Nigeria.

Less than 1 percent of Nigerians use e-purses (Valucard) because, among other inefficien-cies, they are offline, not integrated with host banks, and prone to fraud. In 2004 Visa Cardacquired 15 percent of Valucard, which was expected to give this payments system a boost.The key problems facing the acceptance and use of debit cards/ATM services in Nigeriainclude limited geographic spread of financial institutions, especially in rural areas; inad-equate infrastructure; lack of public awareness; lack of interoperability between issuers andservice providers; and security concerns (Nnanna and Ajayi 2005).

Main Findings in the Intermediary

Informal and Formal Transfer Mechanisms Coexist Mainly Due to a Dual FinancialEnvironment. The UK-Nigeria Remittance Corridor is a dual financial environment, withequal dominance of formal and informal service providers. Although formal remittanceoptions and products exist through banks with wide networks and MTOs, as much moneytravels through informal as formal channels to Nigeria. Informal mechanisms are preva-lent, mainly through travelers who carry cash on behalf of others to Nigeria and distributeit to the beneficiaries. Sometimes, money transferred formally using an MTO or bank requiresan informal component when it gets to Nigeria whereby the money first goes to someone in abig city who then hand-carries it on public transportation to the final recipient.

Remittance Products in Addition to Cash-to-Cash Transfers are Limited. Banks in theUK do not seem to have an interest in developing new remittance products beyond theirtraditional account-holder relationships. This fact could explain in part why migrants pre-fer informal transfer mechanisms. Exclusivity contracts, competition inhibited by distrustof Nigerian Banks by both senders and UK banks, high costs of formal transfers in com-parison to other corridors, lack of competition in the disbursement of remittances in Nigeria,and payments system weaknesses in Nigeria all contribute to the relative high cost of transfersin this corridor.

Potential for New Technologies is Strong. There is potential to develop new remittanceproducts, in the Nigerian market, linked to technology that could help overcome geo-graphic barriers, connect more recipients to formal systems, and reduce costs. Productsusing new technologies could have cost-reducing potentials if their design meets the needsof both senders and recipients in the corridor. There is a need for a remittance product tar-geted to Nigerian migrants and linked to telecommunication devices such as mobilephones that enable transmission of social information in addition to the service. To moveto a situation in Nigeria whereby mobile phone technology can be used to store and trans-fer value, regulatory infrastructure needs to be in place. The present regulatory environ-ment creates additional costs for providers and subscribers and impedes the developmentof the market.


CHAPTER 3

At the Last Mile

This chapter focuses on the issues affecting the distribution of remittances in Nigeria.The chapter is based on interviews with authorities, remittance industry actors,Nigerian remittance recipients, and relevant literature. It provides an overview of

the significance of remittances for Nigeria; information on Nigerians living abroad andtheir beneficiaries; a description of the remittance market in Nigeria, including informaloperators; the regulatory framework affecting remittance transfers; and the Nigerian gov-ernment’s initiatives affecting remittance flows.

Significance of Remittances for Nigeria

Nigeria is the largest recipient of remittances in Africa and the most populous country inthe Region.56 Estimates show that the country receives approximately 65 percent of totalofficial remittance inflows within Sub-Saharan Africa (SSA) and 2 percent of formal globalremittance flows (Figure 11; Orozco 2003a). Nigeria is an oil-producing country and a sig-nificant member of Organization of Petroleum-Exporting Countries (OPEC).57 Neverthe-less, the country’s economic situation remains marked by high levels of poverty andincome disparity. In 2001 approximately 70 percent of Nigerians were living below the

37

56. Excludes North African countries, namely, Algeria, Djibouti, Egypt, Libya, Morocco, and Tunisia.Nigeria has over 130 million people.

57. Organization of Petroleum-Exporting Countries (OPEC) is an international organization madeup of 11 oil-producing nations. They are Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar,Saudi Arabia, United Arab Emirates (UAE), and Venezuela.

international poverty line of US$1 a day.58 In the same year, Nigeria was ranked 18 amongthe top 25 remittance-receiving countries in the world.

In 2004 the Central Bank of Nigeria (CBN) reported approximately US$2.26 billionin remittance inflows, which is equivalent to 3.15 percent of the GDP.59 Remittance flowshave surpassed official development assistance (ODA) since 2002, when they accountedfor nearly five times more than its value of US$271 million (Shah 2005). Oil revenues con-tinue to be the major source of financing to the economy, accounting for US$22 billion in2003.60 In 2002 the CBN began collecting data from banks and MTO bank agents on remit-tances. The increased scrutiny and improved recording of remittances, and the disburse-ment of remittances in foreign currency, which encouraged senders to use formal channelsmore, may explain the sharp increase of these flows (Figure 10).

Only US$842,733,390.16, or 37.25 percent of total remittance flows, are recorded by theCBN to be originated by MTOs and disbursed by banks in Nigeria. The rest are flows thatoriginate in correspondent bank transfers, SWIFT, foreign domiciliary accounts (accountsheld by individuals in foreign currency), noncommercial imports, private source importsand other in-kind transactions. CBN’s compilation of BOP data appears in Box 12.

Informal transfers mainly through friends and family play a critical role in the distri-bution of remittances and in underestimating the total remittance flows.61 An estimated50 percent of remittances to Nigeria are unrecorded. However, when they are added to theCBN’s officially recorded flows, the estimated total inflows were US$2,123.38 million in2003 and US$4,524.64 in 2004. Combining the information from the CBN, Nigerianbanks, and remittance market players, the estimated total current inflow of remittances toNigeria, formal and informal is approximately US$5 billion.62


Figure 9. Worker Remittances to Three West African Countries

Source: World Bank 2006.

0 0.5 1 1.5 2 2.5

0.51

2.27

0.082

Workers’ remittance in US$ billions

Cou

ntrie

sSenegal

Nigeria

Ghana

58. The dominance of the oil sector has led to a negative neglect of the agricultural sector in policyresources, resulting in declining productivity, growth, and competitiveness as well as increased poverty(UNDP 2004).

59. GDP was US$72,105,349,000. IMF balance of payments statistics data show that the total inflowto Nigeria in 2004 was US$2.273 billion (World Bank 2004).

60. The industrial sector comprises crude petroleum, mining and quarrying, and manufacturing(CBN 2003).

61. World Bank BRCA Team interviews with CBN, Abuja, May, 2005. 62. World Bank BRCA interviews. A recent study by the United Bank of Africa (UBA) estimated the

formal inflow to Nigeria to be US$2.9 billion; the total inflow, US$5 billion; and 10 percent annual growth.


Figure 10. Workers’ Remittances to Nigeria, 1997–2004

Source: International Monetary Fund 2005c.

1,8711,544 1,638 1,705

1,303 1,209

1,063

2,273

0

500

1,000

1,500

2,000

2,500

1997 1998 1999 2000 2001 2002 2003 2004

Year

Rem

ittan

ce F

low

s in

(US

$ M

illio

ns)

Box 12: How the CBN Compiles BoP Data

When compiling balance of payments (BOP) data, the CBN considers reports from banks on MTOtransactions, ordinary domiciliary accounts (accounts held by individuals in foreign currency), SWIFTtransfers, correspondent bank transfers, private source imports and other in-kind transactions.

CBN data shows that remittances are increasing and that in-kind remittance are decreasing. Asshown in table, In 2004 the total current transfers recorded by banks as home remittances wereUS$2,262 million. From this amount about $US 510 million were estimated to be in kind trans-fers in the form of consumer goods such as cars and electronics, bringing the total credit toUS$2,772 million.

Current transfers for remittances, 2003–04

Current transfers (credit) US$million 2003 2004

1. General government grants/subsidies, ODA, debt conversion,gifts, TA — —

2. Other sector

a. Workers remittances 1,061.69 2,262.32

b. Other transfers–in kind 1,117.33 509.67

Total credit 2,179.02 2,771.99

Current transfers (debit) US$ million

1. General government

a. Payments to international organizations (930%) public sector FX 81.05 60.19

2. Other sector

a. Workers’ remittances (private remittances, private FX allocation from Nigerian residents who send money abroad) 11.55 20.76

b. Other transfers — —

Total debit 92.60 80.95

Current transfers (net) US$ million 2,086.41 2,691.04

Source: Central Bank of Nigeria 2006.

Locations of Nigerians Abroad

The majority of the Nigerian migrants live in the United States (55 percent), and a signif-icant number live in the United Kingdom (10 percent). These countries constitute thelargest remittance-sending countries to Nigeria, originating approximately 65 percent oftotal remittance flows.63 Since Nigerians speak English, it is practical for them to migrateto English-speaking countries such as Canada, the UK, and the United States. However,migrating to the UK or United States is difficult if one is unskilled or not a student. Newdestination countries that are not English speaking are becoming attractive, includingGermany, Greece, Italy, Netherlands, and Spain. However, migration to Europe hasbecome more difficult as border controls have become tougher. As a result, remittancesfrom South Africa to Nigeria are increasing because of a growing Nigerian expatriate com-munity and the shift of migration flows from Europe. One challenge of tracking Nigeriansin the diaspora is that sometimes they are afraid to identify themselves to foreign missionsbecause they have undocumented immigration status.

Most remittances to Nigeria originate in the United States, in which an estimated 5 millionNigerians live.64 Transaction flows from the United States tend to follow population patterns.Therefore, the highest volumes of U.S. transactions to Nigeria likely come from the highestNigerian-populated states: Texas, New York, New Jersey, Maryland, California, Georgia, andIllinois.65 The United States issues approximately 6,000 green cards to Nigerians each year.Each of these green card holders tends to migrate with approximately three dependents. TheUK issues approximately 26,000 visas annually to Nigerians.66 Approximately 50 percent of


Figure 11. Remittance Flow Origination by MTOs, 2004 (%)


United States,55%

UnitedKingdom, 10%

Germany, 4%

Canada, 3%

Others, 28%

63. World Bank BRCA Team interviews with remittance recipients, MTOs, banks and authorities inNigeria, May 2005.

64. Interviews with major MTO bank agent in Nigeria; data based on market survey March 2006.65. Western Union.66. Interviews with major MTO bank agent in Nigeria; data based on market survey March 2006.

these Nigerians in the United States and UK do not return to Nigeria.67 Of the Nigerians inthe UK, approximately 500,000 have dual citizenship.68

Remittance Beneficiaries

The main destination of remittances to Nigeria is Lagos, which receives approximately60 percent of the flows, followed by Abuja, which receives 15 percent. However, these citiesare not necessarily the final destinations of the funds. It is common for beneficiaries fromsmaller towns to come to large cities to collect remittances because of the more favorableexchange rates.69 Typically, remittance recipients in Nigeria have a relative(s) or friends inthe diaspora who are able to send money home frequently, or infrequently, as in the caseof Ekundayo (Box 13). 70

Recipients of remittances in Nigeria are located predominantly in the southeast andsouthwest regions. There seems to be a link between regions and ethnic groups withsenders in sending countries. For example, the Ibo from the southeast and the Yoruba fromthe southwest constitute the ethnic groups that migrated heavily to the UK. The Cities thatreceive significant amounts of remittances in Nigeria are Benin City, Ikeja, Enugu, Ibadan,Owerri, Warri, Port Harcourt, Kanu, Kaduna, and Abuja.

Some senders’ initial remittances are loan repayments to beneficiaries. It is expensivefor some people to migrate so relatives often pool money to fund migrants’ travel and ini-tial living expenses. After settling in the new country, the migrant repays the money tohis/her relatives. The interviews with recipients revealed that for many Nigerians in the


67. World Bank interviews with major MTO bank agent in Nigeria, data based on market surveyMarch 2006.

68. They tend to remit approximately £5,000 two or three times per year.69. BRCA Team interview with Specifiq Resources Ltd, Licensed BDC and CBN authorities, Abuja,

May 2005.70. Families who do not have relatives abroad would not directly benefit from remittances, unless it

is for a social project, such as building a school, church, hospital, or any other project for community use.

Table 6. Breakdown of Home Remittances through MTOs by Country of Origin, 2002–04

Country 2002 % 2003 % 2004 %

USA 233,354,957.20 52.96 331,383,532.53 54.15 461,515,784.26 54.76

UK 28,998,747.77 6.58 45,123,337.80 7.37 83,210,793.70 9.87

Germany 16,817,182.00 3.82 25,317,588.29 4.14 32,162,655.36 3.82

Canada 14,402,918.68 3.27 18,075,869.29 2.95 25,775,576.51 3.06

Others 147,088,793.29 33.38 192,019,919.87 31.38 240,068,580.33 28.49

Total 440,662,598.94 100.00 611,920,247.78 100.00 842,733,390.16 100.00


diaspora, remittances are a means of paying back the family members who supported theirtravel abroad in cash and kind. After settling in the new country, some migrant workersbecome economically successful and use remittances to extend their success to their fam-ilies at home (Box 14).


Box 13: Making Ends Meet for Ekundayo and His Siblings

Ekundaya Akim is a fourth-year student/senior at the University of Lagos. His major is accounting.He receives 150–250 British Pounds each month from his sister, who resides in the UK. Their par-ents are dead, and he and his sister need to look after his other five siblings, also in university.

His sister moved to the UK 2 years ago. He has no idea where she lives or what she does for a liv-ing. She sends this money through travelers or Western Union. She also sends clothes throughtravelers whenever possible. Each month when the money arrives, his siblings come from othertowns outside of Lagos, and he distributes the money among the six of them. They use this moneyfor clothes, textbooks, and other miscellaneous expenses.

Ekundaya is looking forward to graduation, so that he can begin working as an accountant andrelieve his sister of some of the financial burden of taking care of his siblings.

Source: World Bank field interviews, University of Lagos, Akoka Lagos, Nigeria, 2005.

Box 14: Common Uses of Remittances in Nigeria

Family upkeep and social security. Money is sent back to Nigeria to cover subsistence expensessuch as food, clothing, and medicine. Money is also sent to help elderly and disabled persons.There is no national welfare system so seniors, disabled persons, and orphans must depend onthe generosity of relatives, communities, or charities.

Financing education. Research indicates that school fees are closely associated with remittances.Many people interviewed in both the UK and Nigeria specified school fees for secondary schooland university education as major uses of remittances.

Return on family investments. Many Nigerians living abroad are obligated to send remittanceswhen they come of age and begin earning money. Research indicates that as many as 5–20 indi-viduals or family members, and sometimes a community, pool their money to sponsor a selectedindividual to travel abroad. The individual is selected based on academic or entrepreneurial abil-ity. The people who provide the funding for the individual to travel view it as an investment andthe remittances as a form of pay-back or return on investment.

Special occasions. Since some occasions require a large money outflow, they are often associatedwith remittances. In particular, money is sent to Nigeria to pay for funerals, weddings, and holi-days (Christmas and Hajj). Funerals are very important, elaborate events to Nigerians. Further-more, if a person dies overseas it is often requested that s/he be buried in Nigeria, which increasesthe funeral costs.

Business development and sustainability. Remittances are also finance new business ventures, orsustain existing businesses. Examples of small businesses financed with remittances include soleproprietorships such as MTN kiosks, which sell phone cards and, in some instances, allow cus-tomers to purchase airtime and place a call in the kiosk. Other small businesses developed andsustained by remittances include farms, animal husbandry, fisheries, motorcycle transportation,trading in textiles and second-hand clothing, and video stores for local films.

Source: World Bank BRCA Team interviews in Abuja and Lagos, May 2005.

Using Remittances for Housing

The demand for additional housing units to provide shelter to Nigerians is estimated at16 million.71 The main mechanisms available for raising money to build a house or shelter inrural areas rely on family ties and community-based Rotating Savings and Credit Association(ROSCAs).72 Sometimes, young men build shelters for the community and receive mealsas payment for their service. In the cities, some people borrow money from a cooperativeor bank where their salary is paid.

Although government housing financing arrangements exist, mortgage financing remainsan underdeveloped sector.73 At the present, individuals do approximately 90–95 percent of realestate development or housing finance. Land acquisition is a major problem for prospectivelandowners, especially low-income people, and the legal regulatory framework for land acqui-sition is cumbersome. For many Nigerians, the mortgage financing experience is problematicand requires a certificate of land occupancy. Land sometimes belongs to a community anddoes not have a single certified owner. It is difficult for low-income people to become home-owners (Daramola and Aina 2004). The regulatory framework for land hinders mortgagefinancing. Because land is principal, and sometimes the only asset accepted by banks as col-lateral, this situation may also inhibit small enterprises and mortgage financing in general.

Migrants who wish to return home in the future invest in real estate projects. Some inthe United States have initiated substantial housing investments in their communities oforigin in southeastern Nigeria. The home family occupies approximately half of housesthat make up migrants’ residential housing investments in home villages. However, 30 per-cent of residences in communities of origin are vacant (Osili 2001). It seems that in south-east Nigeria remittances are mostly for the purpose of housing development.

Current housing finance requires a relationship based on trust and integrity between theremittance sender and the person that manages the process. Typically, the sender sends moneyto a friend or relative, who hires a local contractor. The recipient uses the money to finance theconstruction and sends the sender pictures of milestones, that is, visual updates on the progressof the construction. Benin City has the largest concentration of property development approx-imately 15–20 percent in Nigeria through remittances that originate mainly in Italy.74

Remittance Service Providers in Nigeria

Banks that are MTO agents and Bureau de Changes (BDCs) are the main players in Nigeria’sformal remittance distribution market. Banks are the only remittance service provider


71. When looking into remittances and housing in the Nigerian context, it is necessary to distinguishbetween housing and shelter. Shelter is just a place to sleep, while housing is a privilege. It also is impor-tant to distinguish between housing as a process or as a product.

72. Rotating and Savings Credit associations. 73. Government policies aimed at providing affordable and comfortable housing for all Nigerians

include credit policies, insurance companies, specialized institutions, state/municipal government financ-ing, the Federal Mortgage Bank of Nigeria (FMBN), primary mortgage institutions (PMIs), The FederalMortgage Finance Limited (FMFL), and the National Housing Fund (NHF). Sources: 1) Sanusi (2003)and 2) World Bank BRCA Team interviews with officials at the Federal Ministry of Housing and UrbanDevelopment.

74. World Bank interviews with commercial banks, Lagos, May, 2005.


Figure 12. Estimated MTO Market Share in the Origination of Remittance Transfers to Nigeria, 2005 (%)

Source: World Bank BRCA Team interviews with commercial banks and MTOs.

10%

20%

70%

Western Union

MoneyGram

Other (e.g., Vigo,Travelex, Chequepoint)

75. The World Bank BRCA Team was not able to interview Western Union officials in Nigeria due tocompany policy.

76. World Bank BRCA Team interviews with MTO agents in Lagos.

(RSPs) that have authorization from the CBN to distribute remittances. They can receiveremittances directly via bank-to-bank transfer or as agents of international MTOs, such asWestern Union. When people receive remittances through banks that have partnershipswith MTOs, the tendency is for the recipients to take the money to BDCs to receive a favor-able exchange rate since the bank would buy the currency from the recipients at a lowerrate. The postal system has a wide distribution network and is designing new remittanceproducts. Microfinance institutions (MFIs) are not yet active in this remittance market.

MTOs cannot provide remittance services independently in Nigeria without agree-ments with banks that have authorization to distribute remittances. Some MTOs requirebanks to be their exclusive agent while others allow multiple agreements with severalMTOs (Box 15). Western Union has an exclusivity contract with First Bank of Nigeria.75

Banks usually have a physical MTO window or section within their buildings to whichwalk-in customers can come to pick up their remittances. Western Union has the largestmarket share in Nigeria (Figure 12).

Banks must have a large distribution network with branches located throughout Nige-ria’s 36 states to be attractive to international MTOs.76 In addition, the banks must havethe ability to pay out remittances in both foreign and local currency. Most remittancerecipients prefer to collect remittances in US dollars. If a bank cannot provide this service,information will travel via word of mouth throughout the remittances community that theparticular bank is not a good agent for distributing remittances. This message would reflectnegatively on the MTO partner.

A low level of confidence in bank services and a large informal economy are two fac-tors that influence the use of informal transfer systems in Nigeria. The level of confidencein services of Nigerian banks is low, because of banks’ long procedures, complicated forms,


Box 15: Exclusivity vs. Multiple Agreements Agent for One MTO

As of May 2005, United Bank for Africa (UBA) operated 265 branches and cash offices and agen-cies in Nigeria’s major commercial centers, state capitals, and the Federal Capital Territory. Inaddition, UBA has offshore branches in New York and Grand Cayman Island. Since merging withStandard Trust Bank (STB) as part of efforts to meet the CBN capital base requirements, UBA hasover 400 branches. UBA provides remittance services through bank-to-bank transfers and as anagent for MoneyGram.

Remittance business. UBA has a foreign domiciliary account base of US$376 million, ofwhich 20 percent is home remittances. UBA is the largest agent for MoneyGram worldwide,doing roughly 90 percent of MoneyGram transactions in Nigeria. The average remittancetransaction is US$500 a month. The majority of remittances come from US, Italy, UK, Germany,and South Africa. Remittances tend to peak during Christmas, Easter, and summer vacationperiods.

Access to finance. Ninety-eight percent of UBA’s business is individual savings accounts; the restis corporate accounts. The bank cross-sells savings accounts to regular remittance recipients, whohave the option to save in local or foreign currency. Remittances are a lucrative business; UBAgets 25 percent of MoneyGram’s commission. UBA ensures that the foreign currency option forremittances is available even to clients in rural areas. UBA is involved in financial literacy out-reach to schools, churches, traders, market women, and low-income people. UBA tries to encour-age savings as much as possible.

Agent for Multiple MTOs

As of May 2005, Union Bank of Nigeria (UBN) operated 306 branches nationwide with locationsin every state in Nigeria. It also has the largest spread of ATMs in major branches. UBN is an agentfor four MTOs: Vigo, Travelex, Ria, and Money Transfer. UBN has been working with Vigo for 10years and began working with the other companies a year ago.

Remittance business. The amount of transfers done on behalf of Vigo in the first 4 months of2005 was approximately US$1.8 million. In the same period, the total amount from the 4 MTOswas US$2.8 million. The average remittance transaction amount is US$200, and most payouts are inLagos. For the first quarter of 2005, UBN had 6859 remittance transactions. The remittancebusiness is definitely growing; however, it is difficult to estimate the total volume of remittancesto Nigeria. UBN does not break out the remittance flows by country of origin because Vigo, UBN’slargest MTO, has accounts in the US in which all remittances are credited before being paid in therespective country.

Access to finance. Money transfer is a relatively small part of UBN’s business. UBN is the biggestagricultural credit finance institution in Nigeria and has a loan and mortgage subsidiary, UnionHomes and Savings Ltd. Although its client base includes many in rural areas, thus far, there havebeen no incidences of denial of payouts based on CDD. CDD identification documents for col-lecting remittances include driver’s license and international passport. In the absence of formalID, UBN is flexible by allowing the identification of individuals by a recognized authority, such asa village chief. Savings is the bedrock of UBN’s business, and the bank offers the lowest depositamount for opening accounts: 2000 Naira. UBN actively encourages its clients to use the bank ser-vices. ATMs are used to facilitate savers’ access to funds. Anyone can have an ATM card, includinglow-income people.

Source: World Bank BRCA Team interviews with UBN and officials, Lagos, May 2005, www.unionbankng.com/History.htm and www.nigeriabusinessinfo.com/lsetop20.htm

and history of financial distress. People complain that when they collect remittances atbanks, the lines are long and service is slow. Banks typically do not lend to small businesses,and people prefer to take cash because of the history of distressed and collapsed banks.During the period of systemic banking problems in the 1980s, patrons fled. Informal lend-ing is the only immediate available method of financing for small businesses and individ-uals. In part, the large informal economy thrives because the banks are not respondingadequately to the borrowing needs of the average Nigerian.

Regular recipients of remittances usually are encouraged to open bank accounts,including foreign domiciliary accounts. Some banks open personal accounts for as littleas 1,000–2,000, or US$8–16. Fourteen percent of the Nigerian population has bankaccounts, typically time deposit accounts or saving accounts that yield interest.77 This esti-mate may be higher. For example, students in the University of Abuja and University ofLagos revealed that most of them have bank accounts that are primarily for depositingremittances from parents and relatives who are financing their education.

ATM and credit cards are not widely used in Nigeria; currently, there are approxi-mately 100 ATMs.78 ATMs are relatively new and must be located in a secure place. Somebanks offer ATM cards to all customers, including low-income individuals. However, thecards are costly, and fees can be as high as 100 Naira for each withdrawal.

Bureau de Changes

Bureau de changes (BDCs) buy foreign currency from remittance recipients and sell it toNigerians who want to travel abroad. The reason for establishing these institutions in 1989was to broaden the foreign exchange market and improve accessibility to hard currency.The CBN supervises and issues operational guidelines for BDCs. In March 2006, Nigeriahad 293 licensed BDCs.79 They do not maintain correspondent relationships with otherinstitutions abroad. Only banks and BDCs can deal in foreign exchange (FX). BDCs areactive only on the demand side or sale of FX, whereas banks are active on the supply side.The capital base requirement for BDCs is 5 million.80 The BDCs also have a national asso-ciation that promotes best practices.81

BDCs usually are concentrated in the major cities of Lagos, Abuja, and Kano. Thosethat remit FA Francs are concentrated at the borders with francophone countries. BDCsbecame popular for buying and selling foreign currency because banks were exploitingremittance beneficiaries. The average BDC transaction ranges from US$100–500. However,during peak periods (Hajj and Christmas), transactions range from US$1,500–3,000.82


77. Central Bank of Nigeria. Because Nigeria is a cash economy, most of the remittances are held incash prior to being spent.

78. Central Bank of Nigeria. Based on study team interviews with Nigerian banks, many banks planto expand their ATM networks in the near future.

79. These BDCs send monthly reports to Other Financial Institutions Department (OFID) and to theTrade and Exchange Department.

80. A little over US$39,000.81. BRCA Team interview with Specifiq Resources Ltd, Licensed BDC in Abuja, May 2005. 82. BRCA Team interview with Specifiq Resources Ltd, Licensed BDC in Abuja, May 2005.

N

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Exchange rates affect the remittance distribution process. Remittance recipients pre-fer to exchange money at the BDC instead of at banks because BDCs use the market rate,whereas banks use a rate fixed by the CBN. The CBN policy of allowing remittances pay-ments in hard currency has encouraged more people to use formal institutions, such asMTO bank agents and BDCs, thereby reducing the incentive to use the black market. TheCBN has observed that recorded FX inflows have increased since 2002 by 91.57 percent.The three FX rates available in Nigeria are the CBN, BDC, and the parallel market/blackmarket rates (Figure 13).83

The margin between the BDC and black market rate is very narrow, and in time, theCBN expects that the black market will cease to exist. Although the BDCs experience severecompetition with the black market, fewer people are using the black market, as there is evi-dence to suggest the use of counterfeit currency.84 During peak periods, such as Christmas,Easter, Hajj, and vacation periods, there can be a difference of 12–15 Naira between theCBN rate and the BDC exchange rate.


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Figure 13. Historic Data on the Different Foreign Exchange Rates Available in Nigeria, 2000–04

Source: CBN, World Bank.

83. Informal and unregulated moneychangers. 84. BRCA Team interview with Specifiq Resources Ltd, Licensed BDC, and CBN authorities. Abuja,

May 2005.

Postal Service

NIPOST’s extensive postal network within Nigeria has a limited role in the distributionof remittances due to its lacks of adequate resources required to develop remittancepayment infrastructure. After buying equipment, maintenance is an issue. Some chal-lenges for NIPOST are external such as inadequate power supply, bad roads, and liq-uidity, which increase the costs of providing services.85 The Nigerian Postal Service(NIPOST) received inflows from other countries until August 2005. At that time, coun-terfeiting caused members of the public to lose faith in money orders, causing NIPOSTto lose the market share of the distribution of domestic remittance to the banks. Theoutflow of money orders internationally stopped 10 years ago, when the governmentchanged the policy on the outflow of money. Several banks are interested in collabo-rating with the post office because of their extensive network, which gives them a com-petitive edge.

NIPOST is repackaging its money order and postal order products to make them morecompetitive in the domestic remittances market. NIPOST has engaged a consultant from“Cash for Africa” to make domestic transfers faster and efficient. Still in the developingstage, this partnership is expected to establish electronic transfer systems. Although onlybanks can pay out remittances, NIPOST has had a legal treaty since 1964 that empowers it


Box 16: Nigerian Postal Service

The Nigerian Postal Service (NIPOST) has an extensive network of 955 post offices, and over 3,000postal agencies throughout the country. Paid postal agents are appointed in areas in which a postoffice is not available but established demand for postal services exists. Postal agents can sellstamps to the public and deliver mail on behalf of NIPOST but cannot pay remittances.

Postal agents have other businesses to perform in addition to the agency work. NIPOST also issuespost office identity cards to NIPOST customers to identify them in their day-to-day transactionswith the post office and thus avert impersonation and theft. Nigeria recently became the mailhub for the West African subregion. By this status, all international mail from UPU member coun-tries for the region is routed through Nigeria. NIPOST also sells postal money orders, which areredeemable and can be purchased at all post offices, subpost offices, and postal agencies in Nige-ria. They are not redeemable outside Nigeria. Compared to bank drafts, they are faster to obtainfrom any post office, easy to cash at any post office, and attract lower commissions.

Domestic Remittances

Presently, there are remittance flows between Nigeria’s cities and rural areas. The economic activ-ities in certain states determine the flows. The bulk of transfers occur during the holidays, suchas Christmas. NIPOST also tends to have a high volume of receipts in states that have a large stu-dent population. Most receipts are concentrated in the southern part of Nigeria. Students usepostal orders for school fees and miscellaneous expenses.

Source: www.nigpost.com/office.htm

85. Each office has an authorized cash reserve to meet basic cash requirements. This requirement varies fromarea to area. Once NIPOST completes restructuring, it hopes to gain market share in the remittance market.

to deal in monetary instruments. NIPOST transferred this legal treaty of the money ordersto electronic transfers. Therefore, there are no legal barriers preventing NIPOST from dis-tributing international remittances electronically or via money order. The post office alsois a cash office and can facilitate distribution for the banks.

Microfinance Institutions

MFIs are not involved in the remittance industry, because they do not have CBN autho-rization to conduct cross-border transfers. Approximately 90 percent of Nigeria’s busi-nesses are microenterprises, and most still access financial services from informalsources.86 Semiformal and formal providers of microfinance are a small but rapidly grow-ing part of the financial sector in Nigeria. A handful of large microcredit NGOs and locallyowned community banks provide the bulk of services (Charitonenko 2005). The CBN isdeveloping a new MFI policy framework that will require these institutions to convert tomicrobanks but will not impede their developing remittance distribution capacity. Theformal microfinance industry is in its infancy and is not ready to engage in remittancestransfers, because it has a low capital base and lacks the capacity to provide remittanceservices.

Informal Funds Transfer Operators

As mentioned, Nigeria’s dual financial environment, in which formal and informal ser-vices and institutions thrive equally, affects the remittance market. Informal Funds Trans-fers (IFTs) are popular because they not only deliver cash but also give recipients first-handinformation about their relatives living abroad. Onitsha market alone accounts for 47 percentof the container import and export trade to Nigeria,87 and many of its merchants do notuse banks. The typical Nigerian businessperson trades continuously and needs to have heror his cash readily available. Most traders and other small business owners prefer to takebags of money physically, even though they run the risk of attack by armed robbers whentraveling. Some bus lines have begun providing cash courier services in response to thedemand for this service (Box 17).

Although BDCs may not officially transfer remittances, they sometimes conduct remit-tance transfers. Informal brokers conduct money transfers informally wherever Nigerianslive. A small number of BDCs distribute remittances informally and have offices or contactsabroad that collect cash and pay them out in Nigeria. The remittance can take place through asettlement of accounts in the UK and in Nigeria or in kind (cashless) transactions. Foraccount settlements, between contacts, the sender approaches a BDC contact in the UKand pays the contact in British pounds. The contact then asks the BDC in Nigeria to paythe beneficiary in the local currency at the exchange rate agreed on in the UK. The twocontacts settle their accounts in cash. However, this process is not transparent.


86. Microenterprises in Nigeria generally are very small, informally organized business activitiesundertaken by low-income people who employ fewer than 10 workers. Charitoneko 2005.

87. World Bank interviews with Nigerian authorities, May 2005.

In the case of in-kind settlements, the BDC operator in Nigeria asks a contact or senderin the UK to buy an item, such as a car, and to ship it to Nigeria. When the BDC operatorreceives the shipment, s/he pays the beneficiary the equivalent of the car in Naira at a pre-agreed exchange rate, which also allows for a commission. The United States and the UKare the largest sources of in-kind payments, but the volume is unknown. Most of themoney goes to Southwest and Southeast Nigeria, and very little goes to the North. It isunlikely that many BDCs engage extensively in remittances because they are small and donot have the capacity to handle large-volume transactions. Sending money informally inNigeria has a downside since sometimes people misuse money entrusted to them and donot deliver it to the recipients (Box 18).

Legal and Regulatory Framework Affecting Delivery of Remittances

Regulations limit to banks the distribution of remittances and include some minimumstandards on AML/CFT and consumer protection. Regulations limit to banks the distrib-ution of remittances in Nigeria and call for the approval from CBN before they can enterinto an agreement with a money transfer organization. The most significant change in the


Box 18: Jefri Couldn’t Take His JAMB Exams

It was a Saturday morning in Topo, a small village 10 km from Badagri in Lagos state. All seniorsecondary school form III students were taking the Joint Admissions Matriculation Board JAMBexaminations for a chance to attend a Nigerian University in the autumn. Jefri Benedict was hang-ing out in front of a tailor’s shop in frustration. His uncle living abroad had sent him money twicefor registration, and it never reached Jefri because it was misappropriated by the courier. Jefri willhave to wait another year for an opportunity to register and take the examinations. He will haveto wait another year after that for a chance to be admitted to a university in Nigeria.

Box 17: Bus Transport System and Money Transfer in Nigeria

Ekene Dili Chukwu is the largest interstate bus transport system in Nigeria. It transports students,traders, and civil servants within the country. Many passengers receive remittances in Lagos andtransport them in person to other parts of Nigeria. The average travel cost from Lagos to Abujaand other northern states is 3,200 Naira, and to the south eastern states is 2,500 Naira.

Three years ago, in response to increasing demand for courier services, Speed Mark was estab-lished. Although the company deals with international courier requests, within Nigeria, in addi-tion to freight, it also transports cash for 5 percent of the transferred amount. For smallbusinesses, the average cash transferred is 50,000 Naira, and for students, between 5,000–20,000Naira. Sometimes, money is also transferred electronically through an arrangement with FirstAtlantic Bank, which credits its account locally and makes it available to the recipient.

Source: World Bank BRCA Team interviews May 2005.

Source: World Bank interviews, Lagos Nigeria. May 2005.

remittance market within the last three years88 is that the CBN requires banks and MTOsto pay out remittances in the foreign currency unless the beneficiary opts for Naira.

Nigeria has foreign exchange controls. While neither the CBN FX Department nor theNigerian Immigration Service restricts inflows of funds into the country, there are restric-tions to outflows. Travelers leaving the country must declare amounts in excess ofUS$5,000. The CBN does not prohibit foreign domiciliary accounts, and banks have animportant role to play in monitoring STRs to protect the integrity of the financial system.

Banks ask remittance recipients for identification documents. These documents couldbe any official document bearing the names and photograph of the individual, a passport,a driver’s license, proof of address such as utility bills within three months, or a letter froma village chief or other authority certifying the identity of the recipient.89 The BDCs andbanks are required to report STRs to the Economic and Financial Crimes Commission(EFCC). In the case of a suspicious transaction, the institution makes a STR to the Niger-ian Financial Intelligence Unit (NFIU).

BDCs are under the regulation and supervision of the CBN, which issues operationguidelines.90 Some BDCs, now formal institutions, originally were moneychangers. BDCsmay deal with funds from the informal sector. However, they do not have authorizationfrom the CBN to engage in international or cross-border financial activity and maintaincorrespondence relationships with other institutions abroad.91 BDCs are required to sub-mit monthly reports to Other Financial Institutions Department (OFID) and to Trade andExchange Department of the CBN. The CBN performs onsite and offsite supervision ofbanks, BDCs, mortgage institutions, and other nonbank financial institutions. The CBN isexploring ways to bring the BDCs further into the formal financial sector by allowing themto be retail outlets for travelers’ checks. Currently, approximately seven BDCs are enrolledin a pilot program for travelers checks. The BDC regulations are under review by the CBN.The BDCs have a national association that promotes best practices. The BDC associationmembers often rely on one another during periods of currency scarcity.92

Most BDCs use a paper-based accounting system and send monthly transaction reportsto the CBN. The monthly reports include information regarding sales, type of currencyexchanged, and average exchange rate. BDCs are required to alert CBN immediately in theevent of a very large suspicious transaction, for example, US$20,000. To date, there have beenno serious reporting violations (World Bank 2005). BDCs are required to report personaltransactions above US$2,500 and US$5,000 to the Nigerian Drug Law Enforcement Agency.

Financial Market Integrity

Nigeria was delisted from the FATF NCCT list in July 2006 with the condition that thecountry implements a comprehensive AML/CFT regime (Box 19).93 Nigeria has implemented


88. The CBN began collecting data on remittances in 2002. 89. BRCA Team interviews with BDCs, MTOs, and banks I Nigeria, May 2005. 90. Central Bank of Nigeria. To open a Bureau de Change, an application has to be submitted to CBN.

The registration fee is 50,000 Naira. If approved, there is a required deposit of 1 million Naira. The depositis refundable in the event of closure or liquidation.

91. Central Bank of Nigeria. 92. World Bank BRCA Team interviews with Specifique Resources Ltd, Abuja Nigeria, May 2005.93. The FATF list of Non-Cooperating Countries and Territories (NCCT) lists one country, Myanmar.

some actions to comply with the international AML/CFT standards. To combat nationalproblems with corruption and other economic and financial crime and to better complywith international AML/CFT standards, the Economic and Financial Crimes Commission(EFCC) was formally constituted in April 2003. The EFCC’s primary mandate is to inves-tigate and prosecute financial crimes.94 In 2005 the Nigerian Financial Intelligence Unit(NFIU) was established. It is the central agency for the collection, analysis, and dissemina-tion of information on money laundering and funds transfer. The Money Laundering(Prohibition), enacted in 2004, provides that all crimes constitute a predicate offense formoney laundering.

Consumer Protection

Most financial crimes related to remittances in Nigeria are impersonations of beneficiariesin collusion with bank officials and banks’ failure to pay beneficiaries after receiving theforeign transaction. Some cases involve impersonation or a bank withholding payment fora few days to gain some foreign exchange conversion benefit. A mechanism to addressissues of fraud and customer protection has been established by the CBN and the Bankers’Association for customer complaints on banks’ services, which include remittance pay-ments. The Ethics and Professional Subcommittee of the Bankers’ Committee, whichincludes all directors of banks and the CBN Director of Banking Supervision, meets at leastonce a month. Customers can make a complaint but are required to make a refundable


94. United States Department of State Bureau for International Narcotics and Law EnforcementAffairs.

Box 19: Nigeria’s Removal from NCCT List

After five years, the Financial Action Task Force (FATF) has decided to remove Nigeria from its list ofcountries and territories that are noncooperative in the international community’s efforts to fightmoney laundering and financing of terrorism. Being present on this list constrained the ability ofNigeria’s financial institutions to integrate into the international financial system, because of the asso-ciated reputation risks. FATF urges financial institutions to pay close attentions with persons, busi-nesses, or banks that are associated with countries that it considers noncompliant in implementingAML/CFT standards. Therefore, as described in the text, it has been difficult for Nigerian commercialbanks to form and maintain correspondent banking relationships with banks in other countries.

In the remittance industry, it is possible that this situation contributed to the relatively high costsof money transfers in this corridor, and the reluctance of banks to develop remittance productsto facilitate transfers to Nigeria. The recent reforms in the financial sector; changes to legislation,particularly AML/CFT; and increases in accountability and transparency among government offi-cials and public finances all have contributed to change the international perception of financialcrime and corruption associate with Nigeria. Removal from the NCCT list and the reforms beingimplemented should go a long way to make Nigeria’s financial sector attractive to investors, finan-cial institutions, and RSPs.

Source: FATF June 2006.

deposit of 50,000.95 When a claim is legitimate, the CBN authorizes the bank to refundthe customer.

Nigerian Government Initiatives on Remittances and Economic Growth

Although there is no separate remittance policy, the government recognizes that remit-tances are a source of nonoil earnings, which affect the private sector and mentions remit-tances (Nigerian National Planning Commission 2004). Sources of generating nonoilrevenues considered by the Nigerian government include payment of interest on delayedpayments, recovery of looted and misappropriated funds, forming partnerships with theprivate sector, private sector investment in infrastructure, small and medium-size invest-ment equity schemes, and workers’ remittances.

NEEDs

The Nigerian government has embarked on economic reforms to achieve the Millen-nium Development Goals (MDGs).96 The federal government revealed these reformstrategies in 2004 in the National Economic Empowerment and Development Strategy(NEEDS) and the State Economic Empowerment Development Strategy (SEEDS).NEEDS and SEEDS are medium-term economic strategies for tackling Nigeria’s eco-nomic and structural problems and reduce poverty. Some states have begun the processof implementing SEEDS. The NEEDS document states that “if appropriate incentivesare in place, the brain drain of Nigerians could be turned into a brain gain—throughincreased remittances, technology transfer, and even return of capital flight (which couldrepatriate up to $2–$5 billion a year)” (Nigerian National Planning Commission 2004).

NIDOE

Lately, there is a trend to establishing national organizations as opposed to purely ethnic-oriented organizations, for example, Nigerians in the Diaspora Organization Europe.NIDOE focuses on mobilizing Nigerians to develop Nigeria. It is the Nigerian govern-ment’s initiative to engage the diaspora in the task of nation building and to encouragethem to play a role in developing Nigeria’s economy and reducing poverty. NIDOE is thefirst attempt to bring together Nigerians abroad to link them to a registry to involve themin dialogue.97 NIDOE estimated that as many as 15 million Nigerians live outside the country


95. Approximately $390. 96. The eight Millennium Development Goals (MDGs) range from halving extreme poverty to halt-

ing the spread of HIV/AIDS and providing universal primary education, all by the target date of 2015. TheMDGs form a blueprint for development agreed by all the world’s countries and leading developmentinstitutions. They have galvanized unprecedented efforts to meet the needs of the world’s poorest.www.un.org/millenniumgoals/

97. Interview with Charles Onwuagbu, Director of Planning, Research and Statistics, Federal Ministryof Foreign Affairs Nigeria, Abuja, May 2005.

N

(Booker and Minter). In addition to remittances, several Nigerians in diaspora are con-tributing to the development of the nation through sharing professional expertise and facil-itating knowledge transfer.

Examples of Diaspora Activities

IT professionals in the diaspora on visits home bring equipment and volunteer their exper-tise. Digital Aid,98 a U.S.-based, diaspora-led initiative, collaborates with the Africa Lead-ership Forum (ALF)99 to facilitate technology transfer to Nigeria by collecting andtransferring used personal computers to Nigerian schools. Other diaspora associations ofprofessionals, for example, Nigerian physicians and health professionals, occasionally visitNigeria collectively in a voluntary capacity to assist in implementing community healthprojects. As part of its mission, the Association of Nigerian Physicians in the Americas(ANPA) encourages the development of practical solutions to Nigerian health care prob-lems through strategic initiative and field activities.100

Key Findings in the Last Mile

The regulatory framework for the disbursement of remittances encourages formal transfers buthinders competition. The legal and regulatory framework on the distribution of remittances hasencouraged patronage of formal systems. The recent step to allow foreign currency remittancereceipts and conversion at the BDCs generally is believed to have eliminated an importantincentive to informal transfers. However, competition and innovation in the provision of remit-tance services are unduly constrained by restricting distribution of formal remittances to bankswith MTO agreements. Customer protection is available for individuals who send and receivemoney through formal institutions, and transparency is increasing because of new AML/CFTlegislation.

Availability of Formal Financial Institutions Does Not Guarantee a Shift to FormalSystems. Nigeria has over 3,000 commercial bank branches with networks extending to all36 states including the capital. However, a dual financial environment of formal and informalentities and institutions that compete for clients persists. Many Nigerians do not use finan-cial services because of widespread lack of confidence in the system by potential clients,weaknesses in the transport and communications infrastructure outside the urban centers,and an inefficient payments system. Confidence in banking services is low because of longprocedures, complicated forms, and past negative experiences with banks In general, Nigeriansprefer to carry cash, even for business transactions. Many feel that there is a need for financial


98. www.digitalaid.org/cta.htm99. The Africa Leadership Forum (ALF) is Africa’s premier civil society and nonfor profit organiza-

tion. It grew out of the need to assist in improving the capacity and competency of African leaders to con-front development challenges. H.E. Olusegun Obasanjo, Nigeria’s current President, created the forumin 1988, motivated by widespread and palpable crises of leadership and management. www.africaleader-ship.org/About percent20the percent20ALF.htm

100. www.anpa.org/index.html

sector reform to create incentives to encourage the average Nigerian to embrace formalinstitutions, such as faster service and diverse financial products.

Nigeria’s past presence on the FATF NCCT list contributes to a negative perception ofNigerian banks by international financial institutions (IFIs). This perception makes it diffi-cult to develop new remittance products and services in the UK, which could reduce the useof IFTs. In Nigeria, this affects the country’s ability to form corresponding relationships,with some international banks, that would facilitate more remittance flows through banks.

Improving Recording of Remittances Flows by Adopting New Data Definitions. There isneed for additional data and analysis on the income level and other attributes of remittancerecipients and what impact remittances may be having on standards of living and levels ofconsumption, and investment. The role of the informal sector in remittance delivery andthe use of remittance receipts are two other areas that require more study.


CHAPTER 4

Conclusions and PolicyRecommendations

Remittance transfer and distribution inefficiencies characterize the UK-Nigeriaremittance corridor. The quality of services in Nigerian banks remains low (or isperceived to be low), and banks in the UK are reluctant to enter the market more

aggressively due to the high levels of perceived reputational risks associated with fraud, tothe detriment of migrants and Nigerian banks that would like to form correspondencebank relationships. The aim of this chapter is to categorize the findings into the priorityproblem areas for which additional solutions are required. This chapter looks at theunderlying problems and recommends policy actions to address the shortcomings in thecorridor.

Remittance flows between the UK and Nigeria have recorded an increase in the lastfive years. However, a large portion of these transfers is unrecorded because they occur out-side the formal financial sector, predominantly through migrants carrying cash on behalfof others. In comparison to other nations in the Region, Nigeria has a relatively developedfinancial system with the potential to meet the demand of remittance senders and recipients,including those who use informal transfer methods.

Conclusions

The main findings of this report are summarized in Table 7. Policymakers in the UK andNigeria could consider some lessons from other corridors, for example, the U.S.-Mexicocorridor. These experiences of other countries and corridors could provide relevant andhelpful perspective and guidance to policymakers.

57

This report has identified four priority areas within the corridor for policymakers toaddress for further action to ensure that transactions in the corridor become increasinglyformal, and that the market becomes more efficient:

■ Need for new transfer mechanisms tailored to meet the demands of the Nigeriandiaspora.

■ Importance of bilateral agreements between remittance sending and receivingremittance countries.

■ Limited availability of remittance products are keeping transfer fees high.■ Improving recording of remittances flows by adopting new data criteria.

1. Need for New Transfer Mechanisms Tailored to Meet the Demands of the Nigerian Diaspora

Collective remittances are an important source of remittance flows for Nigeria. In effort,to enhance the development impact of these flows, the Nigerian government can considermatching the collective remittances from diaspora associations, which communities canuse for scholarships, schools, roads, and other community development projects.101 In theUnited States, hometown associations are philanthropic organizations that raise money tofund community projects in Mexico to benefit their families and prepared their members


Table 7. Main Findings

First Mile There is a need for remittance products that tailored tothe needs of Nigerian diaspora.

An enabling regulatory environment for RSPs (banks and MTOs) has not significantly increased participation in this remittance market.

Governments’ intervention beginning with a bilateral agreement between the UK and Nigeria is important to encourage formal transfers.

Intermediary Stage Informal and formal transfer mechanisms coexist in this corridorbecause of the dual financial environment in Nigeria. There are limited remittances products beyond cash-to-cash transfers.

There is a strong potential for new technologies to help facilitate remittances.

Last Mile The regulatory framework for the disbursement of remittances has promoted the use of formal transfers and could be enhanced to promote higher competition.

Availability of formal financial institutions does not guarantee a shift to formal transfer systems.

Improving recording of remittances flows by adopting new definitions.

101. In the “3 × 1” program in Mexico, the government matches every dollar sent by the migrants with$3 from the federal, state, and municipal governments to fund community projects.


for their retirement. They serve as a future investment vehicle and help migrants to takepositions of leadership that might otherwise not be available to them (Alarcon 1995).

Remittances are a major source of informal housing finance for Nigerians. Several Nigeriansabroad already finance housing construction and home improvements through remittances.Therefore, there is a demand for a more formal system of managing these flows. Because manyNigerians in the diaspora send money for building homes in Nigeria, linking these remittancesto mortgage institutions will contribute to formalizing these flows. Box 20 illustrates how aMexican government program helps migrants to link remittances to mortgage products. Devel-oping the mortgage market in Nigeria could lead to opportunities for cross-selling mortgageproducts to remittance senders and recipients. A start could be to develop mortgage productsthat specifically target Nigerians abroad, such as like premium accounts with online access orcombining mortgage products with real estate management services.

2. Importance of Bilateral Agreements Between Remittance-Sending and Remittance-Receiving Countries

The governments of the UK and Nigeria increasingly are recognizing the importance ofremittance flows and are taking positive steps to encourage them. The UK governmentis initiating RCPs with major destination countries, including Nigeria, and the Nigeriangovernment recognizes the importance of remittance flows in the NEEDS document.Furthermore, to encourage formal remittance transfers using MTOs and banks, the CBNrequires these institutions to pay beneficiaries in foreign currency. The diaspora must beactively engaged in both national and community or grassroots development schemes.

3. Limited Availability of Remittance Products is Keeping Transfer Fees High

Competition and innovation in the provision of remittance services to Nigeria is con-strained by restricting distribution to banks and by the presence of exclusivity arrangementsbetween some banks and MTOs. Increased competition in the UK-Nigeria remittancemarkets will reduce costs, as in the other corridors. The regulatory environment shouldenable the entry of more competitors for the distribution of remittances, such as, BDCs,MFIs, the postal service, telecommunications providers, and by encouraging commercialbanks to develop remittance retail products.

Exclusivity arrangements are limiting options for consumers. Banks in Nigeria haveindicated interest in expanding their remittance product offerings, by engaging multiple part-ners, particularly, lower cost MTOs. However, they are restricted by exclusivity contracts withMTOs. In the UK, the fees for sending transfers of £100 and £500 range from £2.50 to £40.Sending money to Nigeria is on the high end, for example, it is cheaper to transfer GB£500to Bangladesh, China, and India, from the UK. Figure 14 shows a comparison of the averagecost for transferring money from the UK to six countries including Nigeria. Although thereappears to be an overall decrease in the fees charged to the sender, this decrease in costs is notreflected in the UK-Nigeria remittances corridor as in other corridors.102

102. World Bank BRCA Team interviews with senders in the UK and authorities in Nigeria.


Box 20: Remittances + Housing = Market Opportunity The Mexican Experience

In 2002 Sociedad Hipotecaria Federal (SHF) was created with two main objectives: (1) to providelong term funding to financial intermediaries and hedges the inherent interest rate risk. SHF can-not lend directly to the public; and (2) to offer mortgage insurance, timely payment guaranteeson bonds, and a cover against real minimum wage depreciation (to enable homeowners to havepayments linked to changes in the minimum wage).

Due to the increasing flow in remittances, the Mexican government has created a mortgage pro-gram that helps to invest these resources so that the migrant can build a patrimony for his/herfamily. Different studies suggested that between 9 percent to 16 percent of the remittances arechanneled to housing expenses. SHF estimates a potential volume of 9 percent or an investmentin 185,000 mortgages.*

SHF developed a program for Mexicans migrants living and working in Canada and the UnitedStates who are interested in purchasing houses in Mexico. Payment transactions occur in Canadaand the US; the migratory status of the loan recipient is irrelevant to their participation in theprogram. Main points of the program are:

1. It is oriented to the acquisition of a new house or a used one.

2. The participation of a Co-borrower is required.

3. The loan is up to $1,700,000 pesos at a fixed interest rate in index-linked currency (known asUDIs in Mexico) or pesos.

4. The maximum period of the loan is 25 years.

5. The resources are lent by a financial intermediary with the support of SHF.

No

Yes

When the saving program is finished

The person need to call toone of the three sofoles in

Mexico or in theUnited States.

The sofoles will give theinformation asked and therequirements for the loan.

The migrant gets therequirements and ask for a

non official qualification

Approvequalification?

The sofolanalyzes the

loan

The migrant can join thesaving program in Bansefi orin banks that are members.

The migrant with hisremittances,

without commissions, paysfor the credit

The deal is closed andthe loan is given

The consulate gives apower to a member of the

family or to the Co-borrowerto close the deal in Mexico

The migrant or his familylook for a house in Mexico

(used or new)The loan is authorized

Source: Sociedad Hipotecaria Federal.Note: * It was considered a credit in pesos with 20 years, with a payment factor of 13.64 to 1,000 and avalue of $650,000 pesos.

4. Improving Recording of Remittances Flows by Adopting New Data Definitions

Since 2004, the statistical community has agreed on several steps to improve conceptsand compilations practices on data collection on remittances. A working group was

formed jointly by the Eurostat and the IMF Statistics Department to improve compilationguidance based on conceptual improvements, which were developed by the UN Tech-nical Subgroup on the Movement of Natural Persons (TSG) and other stakeholders. Itwas approved by the INF Committee on Balance of Payments Statistics. In January2005, there was agreement that the balance of payments statistics are the appropriateframework for collecting, reporting, and improving official statistics on remittances.103

New concepts and definitions proposed and adopted by the UN TSG include:

■ Resident households to or from other nonresident households will replace the“workers remittances” item in the balance of payment with a new component,“personal transfers,” which comprises all current transfers in cash or in kind madeor received.

■ A new aggregate, personal remittances should be reported in the balance of pay-ments as a memorandum item. It comprises current transfers in cash or in kind,made or received by resident households to or from nonresident households, and“net” compensation of employees earned by persons working in economies inwhich they do not reside. This concept refers to “compensation of employees.”

■ “Migrants transfers” will be removed from the capital account of the balance ofpayments.

■ A new aggregate of total remittances should be introduced in the balance of pay-ments as a memorandum item comprising of “net” compensation of employeesand current transfers in cash or in kind payable by resident sectors to nonresidentsectors or to nonresident households and nonprofit institutions serving house-holds (NPISH), and receivable by resident households and NPISH from any non-resident sector.


Figure 14: MTOs Average Fees for Transferring £500, 2004

Source: World Bank and DFID Sending Money Home, 2004. www.sendingmoneyhome.orgNote: Fees may be lower for electronic transfer, where available. This table shows average transferfees reported by MTOs only. Exchange rates and recipient costs are not included.

Nigeria

Kenya

India

Ghana

China

Bangladesh

0 5 10 15 20 25 30 35

GBP

25.4

31.3

15

25.6

18.3

22.5

103. In January 2005, a meeting to discuss the measurement of remittances was held in Washington,DC in response to requests from users, including G-8 Heads of State meeting at Sea Island in June 2004,to improve these data. www.imf.org/external/np/sta/bop/pdf/ao.pdf


104. For example, a forum coordinated by the Center for Latin America Monetary Studies (CEMLA)project to improve central bank remittance reporting and procedures is supported by the MultilateralInvestment Fund of the Inter-American Development Bank and receives technical advice from the IMFand World Bank.

105. An example of this type of bilateral agreement is the Partnership for Prosperity, signed by theUnited States and Mexico. www.state.gov/p/wha/rls/fs/8919.htm

Work continues on improving the reporting and compilation mechanisms which will pro-vide guidance in the medium term.104 Reporting of bilateral remittance flows is not requiredin the balance of payments, but the TSG’s recommendation is that flows to and from majorpartner countries should be identified. A working group was formed to review methods anddevelop detailed guidance for compiling remittances data. These data include the use by com-pilers of bank reporting systems, modeled estimation based on household surveys and laborforce data, and in some cases, counterpart data. However, there are obvious weaknesses inmany of the methods due to, for instance, reporting thresholds of banks, outdated sourcesfor estimating informal parameters, and difficulties in capturing informal flows.

Policy Recommendations

The following recommendations are proposed to increase the use of formal remittance sys-tems and provide suggestions on how to promote international best practices for integrityand transparency in the market. The UK government has taken positive steps to promoteformal transfer mechanisms, and reduce transaction costs and barriers to access for remit-tance senders and recipients. DfID is developing initiatives in partnership with recipientcountries—among them, the Nigerian government—to reduce the cost of remittances andenhance the impact of these flows in the lives of the recipients. The proposed remittancecountry partnership (RCP) between the UK and Nigeria provides a basis for dialogueaimed at maximizing the economic impact of remittance flows on the recipients and theirability to engage the private sector.

The RCP between the UK and Nigeria is an ideal platform to facilitate the implemen-tation of the policy recommendations. Through the RCP, both countries can work onproduct development, thereby increasing competition, improving transparency, influenc-ing policy by addressing, legal and policy constraints to remittance flows between the UKand Nigeria, promoting the use of technology to develop innovative products, and build-ing the capacity of remittance-receiving institutions in Nigeria. The success of these ini-tiatives depends on the commitment of both governments to develop effective polices.

Given that remittances are private flows, any initiatives necessarily would involve theprivate sector. Incentives should facilitate the development of transfer mechanisms forremittances, and promote investments and new economic activities by the Nigerian dias-pora.105 The RCP might include actions toward three main objectives:

1. Building confidence in and the capacity of formal institutions2. Increasing capacity in data collection and research3. Enhancing the regulatory framework affecting remittances.

Building Confidence in, and Capacity of, Formal Institutions

Actions are necessary to combat the widespread lack of confidence in the formal financialinstitutions. In particular, Nigerian banks need to be able to meet the financial needs ofNigerians. Expectations are that the recent bank consolidation in Nigeria will producemore robust banks. Both the public and private sectors should participate in initiatives thatgenerate awareness of, and confidence in, basic banking services, including remittances ser-vices, in both the UK and Nigeria by sponsoring more financial literacy programs.

Building capacity among Nigerian banks to provide better services. It is important thatNigerian banks take action to provide the high-quality, reliable, and timely services that theaverage Nigerian expects from a bank. Consumer research by banks or an independent privatesector research firm would help identify the knowledge gaps between customers’ needs andexpectations, and banks’ perceptions of them. Banks need to be encouraged to go beyondthe role of being agents of MTOs and to become more proactive by designing remittanceproducts for the diaspora. Recommended actions for Nigerian banks are:

■ Develop courteous and friendly staff, simpler forms, and clear communication ofbank policy to clients. All of these will make a visit to the bank less intimidating.

■ Ensure that they have enough cash on hand to meet the demands of their remit-tance disbursement locations and that beneficiaries receive their remittances with-out excessive delays.

■ Recruit and hire staff who have integrity. Such staff will provide reliable service andreduce the incidences of impersonation and fraud in collusion with criminals.

■ Increase the number of tellers. More tellers will speed up the disbursement ofremittances, which will reduce the time customers wait in line for service.

■ Design products that can link to other products, such as mortgages.

Increasing Capacity in Data Collection and Research

Even though both Nigeria and the UK have taken steps to collect and study remittance flows,they still need to enhance their capacities to collect and record data on the UK-Nigeriaremittances corridor. Improved data collection would enhance the understanding of thecharacteristics and the potential of the various remittance corridors that end in Nigeria. Inaddition, improved collection of data would promote the development of the private sec-tor and provide the government and policymakers with the knowledge necessary for action.

Many BDCs Must Improve their Record-Keeping Capacity by Introducing AutomatedSystems. Most BDCs interviewed in Nigeria keep manual records. Automation wouldincrease transparency and achieve the record-keeping requirements to comply with newAML/CFT standards. With improvement in the BDCs’ recording capacity, these institutionscan become a secondary source of data that can be used to capture the amount of fundstransferred informally.

The Federal Office of Statistics (FOS) could build capacity in providing timely and currentdata on remittances. Furthermore, the various data-collecting bodies including the CBN, andthe Department of Planning, Research and Statistics, Federal Ministry of Foreign Affairs Nigeria,should increase and improve their coordination. According to the IMF’s 2005 Article IV


Consultation report, private capital movements are under-recorded, and the trade datareported by FOS based on customs data and those reported by the CBN based on banking datadiffer sharply. To design remittance products for the beneficiaries and financial products forlow-income people and to measure the impact of remittances for individuals, a household sur-vey by the CBN, FOS, and other relevant institutions is required.

More Research is Necessary by the UK and Nigeria on the Available MTO and BankTransfer Services. This information is important to understand their underlying cost structureto make the regulatory and policy changes that will increase the use of formal channels ata reasonable cost.

More research could explain: (1) why the senders are using informal intermediariesfrequently, despite a relatively favorable regulatory environment in the UK for formalchannels; (2) the characteristics of senders—mainly highly educated and professional; and(3) the availability of formal financial institutions.

Why a highly-educated entrepreneurial migrant population chooses to use informalmeans to transfer money is perplexing. Consumer research in the UK by banks, the gov-ernment, or another interested party would provide illuminating information for bothbanks and policymakers to find out whether use of informal means is a reflection of thequality of the financial system; or is due to migrants’ being undocumented, unaware ofremittance products, or having limited access to financial services.

Enhancing the Regulatory Framework That Affects Remittances

Regulations affecting remittances should be transparent and consistent in both countriesto give predictability and to ensure a level playing field for market competitors. While theregulatory system in the UK for money transfers is liberal, the regulatory framework inNigeria hinders competition. Regulations on remittances should foster both competitionand private sector expansion to stimulate better services, and an efficient formal transfersystem. Regulations should prohibit exclusivity arrangements in partnerships between sys-tem operators and distributors to enable the entry and viability of new competitors in theremittance market.

Market Entry for Other Players. Bank agents of MTOs are the sole distributors offormal remittances in Nigeria. BDCs play a very important role; the postal service is notyet actively involved in the remittance market; and IFT systems are widely used.

Policymakers can stimulate competition in three ways, by making it possible for:

1. MTOs to operate in the market without engaging banks as agents.2. BDCs to become formal distributors of remittances acting as agents.3. The postal office network to build capacity in distributing remittances, particularly

in remote areas that lack banks.

Some BDCs in Nigeria are already transferring remittances informally. Licensing and orregulating them as agents of MTOs would bring more formality to the system.

Although MFIs are not yet part of the distribution network for remittances, they havenetwork potential because of their locations. Several also have the trust of the communities


whom they service. For an MFI to move into the remittance distribution business, it needsenabling regulatory structure, infrastructure, and the skills to run a remittance business.Another option is to formalize the hawala-type informal transfers in a way that engagesMFIs that are trusted within the community as the distribution agents, while developingcontacts abroad to initiate transactions.

The Nigerian postal service has remarkable potential for remittance distribution. Inaddition to an extensive network with a presence in every state, it also has the advantage ofa treaty that enables it to handle monetary instruments. The government could encourageand enhance the capacity of the postal service to develop sustainable partnerships withMTOs located at the origination of remittance flows.

Banks’ continued compliance with CBN regulations and the FATF recommendationson AML/CFT will strengthen the overall integrity of the financial sector, and encourageadditional corresponding relationships with banks in other countries.

Creating an enabling environment that will leverage the current proliferation oftelecommunication technologies in Nigeria to provide more innovative and accessibleremittance products will encourage the shift from informal to formal funds transfer. InNigeria, the mobile telecommunications industry players are overregulated and highlytaxed. For an industry that is only four years old, this degree of regulation could restrictgrowth and market penetration. The NCC should develop an appropriate regulatory struc-ture to ensure that providers are not subject to double taxation. Regulations that encour-age mobile telecommunication providers to share cell power sites will reduce costs. Policyaction regarding power supply is crucial. Frequent power loss means that telecommunica-tions providers must run on generators 24 hours a day.


APPENDIX A

United Kingdom Regulatory Overview

Money remittance is not a regulated activity (as defined by the Financial Servicesand Markets Act 2000). Therefore, it is not subject to regulation by the FinancialServices Authority or other designated professional bodies.106 However, Money

Service Business (MSB) activities (money remittances; bureau de change, or BDCs; andcheck-cashing services) have been subject to the Money Laundering Regulations since1994. These regulations require MSBs to implement appropriate anti-money-launderingprocedures. Since 2002, all MSBs, except firms regulated by the FSA that also provide MSBservices, have been required to register with Customs, now Her Majesty’s Revenue andCustoms (HMRC).

HMRC Supervision

All firms undertaking MSB activities that are not regulated by the Financial ServicesAuthority (FSA) must register with HMRC. HMRC is the supervisory body for dedi-cated MSBs, which include money transmitters, bureau de changes, and third-partycheck cashers. Under the Money Laundering Regulations, these businesses must apply forregistration with HMRC. The only exceptions are businesses that already are regulated

67

106. Information drafted by DfID, HMRC, and FSA.


by the FSA, such as banks, building societies, and other financial institutions. There areapproximately 990 money transmitters on the register operating through approximately19,000 premises. The businesses pay a registration fee of £60 per set of premises. HMRCaims to obtain voluntary compliance by providing these businesses with information andguidance in the form of guidance notices and a video on the application of the moneylaundering regulations. All registered businesses receive visits from HMRC staff (1) toconfirm that they have the procedures in place to comply with the anti-money-launderingregulations and (2) to advise them at which points their systems need improvement.Failure to comply with the regulations may result in written warnings and ultimately inpenalties for persistent noncompliance.

FSA Supervision

Firms authorized by the FSA for their regulated activities, such as accepting deposits, mayalso offer MSB services (retail and wholesale banks may do this). Typically, the MSB ser-vices are money remittances (a common service) and bureau de change services. (FSA isaware of at least 14 FSA-regulated firms that provide these services). FSA looks at the MSBactivities of these firms as part of the general supervision of the wider money launderingsystems and controls of the firm. The FSA risk assessments of firms consider MSB activi-ties if they are “material,” that is, if they account for more than 10 percent of the firms’business or have particular strategic importance or risk.

Box A1: EU Payments Directive: New Legal Framework for Paymentsin the Internal Market

The European Commission's key aim with the EU Payments Directive is to facilitate the creationof a Single European Payments Area (SEPA). With the introduction of the euro, the EC sees this asan important political priority.

However, the directive also will significantly impact money remitters by creating the possibilityof a license for them to operate EU-wide. Such a license could substantially benefit larger com-panies. In many EU member states, it will reduce regulatory entry barriers from the currentregime, which requires a banking license to offer remittance services. However, in the UK, moneyremitters are not subject to financial regulation, although they must comply with anti-money-laundering requirements. The directive therefore likely will mean a slightly higher level of regu-lation in the UK. The precise level will depend on the outcome of negotiations in the EuropeanParliament and Council of Ministers, once the Commission has adopted a legislative proposal forthe directive.

The UK government has sought to ensure that the regime introduced by the directive will be pro-portionate to the risks of providing payment services. These are not equivalent to the risks ofdeposit taking. The directive also is likely to contain a waiver that will give Member States theoption to exempt small remitters from the requirement to seek a license. However, even if theyare waived, small remitters still will have to comply with the requirements regarding the infor-mation given to customers, execution of payments, and liability.

The Directive is likely to come into force in 2008.

Source: HM Treasury.


European Developments

The European Commission is developing a new legal framework for payment services. Ifimplemented, the Payment Services Directive (PSD) will introduce an authorization/reg-istration regime for payments service providers (Box A1). Under the directive, all paymentservice providers will be subject to business regulation, and payment service providers thatare not credit institutions or e-money issuers will be subject to prudential regulation.Money transfers are expected to fall within the scope of the directive. Who will be madethe Competent Authority for the PSD is not yet decided. The timetable suggests that thedirective could be implemented in 2008–09.

The Third Money Laundering Directive (expected to be implemented by the endof 2007) will require Member States to have a licensing/registration system for MSBsthat includes a fit and proper test for those who direct or beneficially own the busi-ness. At present, the registration system for MSBs operated by HMRC does not includesuch a test.

An EU Regulation is being developed by the EC that would require payers’ informa-tion to accompany credit transfers and transfers sent by money remitters. The regulationwill give effect to Special Recommendation VII (SR VII) from the Financial Action TaskForce (FATF), the intergovernmental body that sets the international standards againstmoney laundering and terrorist financing.

APPENDIX B

Nigeria Regulatory Overview

Regulatory Authority: Central Bank of Nigeria

In Nigeria, only banks may pay out remittances. Banks and other financial institutions areregulated by the Central Bank of Nigeria (CBN). As of April 2005, 89 banks and 293 bureaude changes were licensed to operate in Nigeria. However, this number is expected todecrease due to ongoing consolidation.

The CBN is responsible for general banking supervision and licensing banks to operatein Nigeria. The CBN supervises deposit-taking banks, discount houses, primary mortgageinstitutions, community banks, finance companies, bureau de changes (BDCs), and devel-opment finance institutions. Two CBN departments—the Banking Supervision (BSD) andOther Financial Institutions (OFID)—are responsible for carrying out supervision. BSDsupervises banks and discount houses. OFID supervises community banks and other nonbankfinancial institutions, including BDCs. The supervisory process involves both on-site andoff-site supervision.107

To participate in the Nigerian remittance market, a money transfer operator mustenter into an agreement with a Nigerian bank, and a Nigerian bank needs CBN approvalbefore it can enter into an agreement with an MTO.

The CBN allows Nigerian residents to operate foreign domiciliary accounts, or homeremittances. CBN started collecting information on home remittances in 2002. Banks andBDCs are required to submit monthly reports to the CBN. Since only banks can pay outremittances, their reports include information on home remittances.

71

107. Central Bank of Nigeria, 2006, www.cenbank.org/supervision/framework.asp

Microfinance

The importance of the fledging microfinance industry in Nigeria recently caught the atten-tion of policymakers and international donor committees. These groups are making effortsto improve the policy, legal, and regulatory framework for microfinance.

Physical Transport of Cash

Depending on the type of outbound travel, the Nigerian government has two differentrestrictions. Individuals traveling under the business travel allowance (BTA) are eligiblefor a maximum of US$2,500.00 per quarter or US$10,000 a year in the foreign exchangemarket. Under the Personal Travel Allowance (PTA), beneficiaries above 12 years old areeligible for US$2,000.00 twice a year. For travels to countries in the ECOWAS sub-region,BTA and PTA are issued in ECOWAS travelers’ checks.108

AML/CFT Status

Nigeria is 1 of the 2 countries on the FATF Non-Cooperative Countries or Territories (NCCT)list. According to the Annual Review of the NCCT list on July 2, 2004, Nigeria:

demonstrated an unwillingness or inability to co-operate with the FATF in the review of itssystem, and when placed on the NCCT list in June 2001, met criteria 5, 17, and 24. It partiallymet criteria 10 and 19, and had a broad number of inconclusive criteria as a result of its gen-eral failure to co-operate in this exercise. (FATF 2004a)

Since 2001, Nigeria has “substantially improved its co-operation with the FATF and itswillingness to address its anti-money-laundering deficiencies” (FATF 2004a). Furthermore,Nigeria has enacted several pieces of legislation that strengthened its AML/CFT regime. Forexample, one enactment extended predicate offenses for ML to any crime or illegal act,certain AML obligations to include nonbank institutions, and customer identificationrequirements to include occasional transactions of US$5,000 or more. Later enactments(1) improved licensing requirements for financial institutions; (2) broadened the inter-pretation of financial institutions and scope of supervision of regulatory authorities ofmoney laundering activities; (3) improved customer identification requirements; and (4)improved suspicious transaction reporting (STR) provisions by removing a previousthreshold. Box B1 gives an overview of the legislative efforts to combat money launderingand financing of terrorism in Nigeria.

For example, one enactment extended predicate offences for ML to any crime or illegal act,certain AML obligations to include nonbank institutions, and customer identification require-ments to include occasional transactions of US$5,000 or more. Later enactments (1) improvedlicensing requirements for financial institutions; (2) broadened the interpretation of financialinstitutions and scope of supervision of regulatory authorities of money laundering activities;


108. Central Bank of Nigeria 2006, www.cenbank.org/monetarypolicy/Reform.asp

(3) improved customer identification requirements; and (4) improved suspicious transac-tion reporting (STR) provisions by removing a previous threshold.

International Cooperation

According to the U.S. State Department’s International Narcotics Control StrategyReport (INCSR 2005), “Nigeria is a party to the 1988 UN Drug Convention, the UNConvention against Transnational Organized Crime, and the UN InternationalConvention for the Suppression of the Financing of Terrorism.” In addition, Nigeria hassigned the UN Convention against Corruption. Besides having entered into a MutualLegal Assistance Treaty with the United States, Nigeria has signed MOUs with India,Iran, Pakistan, Russia Federation, and Uganda to facilitate cooperation in the fightagainst narcotics trafficking and money laundering. Nigeria has a broad network of bilat-eral agreements for exchange of information on money laundering with South Africa,the United Kingdom, and all ECOWAS countries. Last, Nigeria has been instrumentalin the establishment of a permanent secretariat for the Intergovernmental Task Forceagainst Money Laundering in West Africa (GIABA). GIABA is in the process of becom-ing an FATF-Style Regional Body (FSRB).


Box B1: Legislation to Combat Money Laundering and Financingof Terrorism in Nigeria

Since 2001, Nigeria has “substantially improved its co-operation with the FATF and its willingnessto address its anti-money laundering deficiencies.” Furthermore, Nigeria has enacted severalpieces of legislation to improve its AML/CFT regime.

In December 2002, Nigeria was placed on the NCCT list and under threat of a FATF recommen-dation for countermeasures. At that point, the country enacted three pieces of legislation:

1. Amendment to the 1995 Money Laundering Act to extend the scope of the law the proceeds ofall crimes

2. Amendment to the 1991 Banking and Other Financial Institutions (BOFI) Act expands coverageof the law to stock brokerage firms and foreign currency exchange facilities, gives the CBNgreater power to deny bank licenses, and allows the CBN to freeze suspicious accounts

3. Economic and Financial Crimes Commission (Establishment) Act to establish the EFCC, whichcoordinates anti-money-laundering investigations and information sharing.

Nigeria enacted the Money Laundering (Prohibition) Act and the Economic and Financial CrimesCommission (EFCC) (Establishment) Act in 2004, respectively. These laws repealed the previous ver-sions and addressed the main remaining legal deficiencies. In 2004 the FATF noted that Nigeriamust “focus on comprehensively implementing these AML reforms, including fully establishingthe EFCC to enable it to function as an effective FIU.”

In 2005 the EFCC established the Nigerian Financial Intelligence Unit (NFIU), which plays a pivotalrole in receiving and analyzing STRs. The NFIU has access to records and databanks of all gov-ernment and financial institutions and has memoranda of understanding (MOUs) on informationsharing with several other financial intelligence centers. The establishment of the NFIU was partof Nigeria’s efforts toward removal from the list.

Sources: United States Department of State Bureau for International Narcotics and Law EnforcementAffairs 2006, Financial Action Task Force 2004a.

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———. 2006. FATF Typologies Report 2005.Financial Services Authority. 2005. www.fsa.gov.uk.First Data Corporation. 2004. Annual Report. www.ir.firstdata.com/ar2004v2/firstdata_final/.FIRST Initiative Information Exchange. 2005. “General Financial Sector Overview (Nigeria).”

www.firstinitiative.org/InformationExchange/Countries/country_information.cfm?iEligibleCountryID=103. Accessed online on October 13, 2005.

G8 Information Centre. 2004. “G8 Action Plan: Applying the Power of Entrepreneurship tothe Eradication of Poverty.” Sea Island Summit Documents. www.g8.utoronto.ca/summit/2004seaisland/poverty.html

Genesis Analytics. 2003. “African Families, African Money Bridging the Money TransferDivide.” A Study on the South African Money Transfer Environment for FinMarkTrust. www.gdrc.org/icm/remittance/FinMarkRemit.pdf

Grace, D., and A.C. Evans. 2003. “Offering a Practitioner’s View of Remittances.” WorldCouncil of Credit Unions, Washington, D.C.

GSM Nigeria Consultative Forum and Phillips Consulting. 2005. Joint Economic Devel-opment Framework with the Nigerian Mobile Telecommunications Industry.

Gwin, P. 2005. “Making the Connection: The Jump from Wired to Wireless Is ChangingAfrica.” Special Issue on Africa, National Geographic.

Haque, R. 2002 . “Migrants in the UK: A Descriptive Analysis of Their Characteristics and LaborMarket Performance, Based on the Labor Force Survey.” Department for Work andPensions. www.dwp.gov.uk/publications/dwp/2003/migration-report/full-report.PDF

Hernández-Coss, R. 2005a. The U.S.-Mexico Remittances Corridor: Lessons on Shifting fromInformal to Formal Transfer Systems. World Bank Working Paper 47. Washington,D.C.: The World Bank.

———. 2005b. The Canada-Vietnam Remittances Corridor: Lessons on Shifting from Infor-mal to Formal Transfer Systems. World Bank Working Paper 48. Washington, D.C.:The World Bank.

Hernández-Coss, R., I. Endo, G.G. Afram, and S.R. Shrestha. 2007 (forthcoming). TheQatar-Nepal Remittance Corridor. World Bank Working Paper No. 97. Washington,D.C.: The World Bank.

Her Majesty’s Revenue and Customs. 2005. www.hmrc.gov.uk.IMF (International Monetary Fund). 2003. Balance of Payments Statistics Yearbook.

Washington, D.C.———. 2004. “IMF Concludes 2004 Article IV Consultation with Nigeria.” Public Infor-

mation Notice. Washington, D.C.———. 2005a. “Regulatory Frameworks for Hawala and Other Remittances Systems.”

Monetary and Financial Systems Department. Washington, D.C.———. 2005b. “Two Current Issues Facing Developing Countries.” Chapter 2, World

Economic Outlook. www.imf.org/external/pubs/ft/weo/2005/01/pdf/chapter2.pdf.


Inter-American Dialogue. 2004. “All in the Family.” Report of the Inter-American DialogueTask Force on Remittances.

International Narcotics Control Strategy Report (INCSR). 2005. “Volume II: Money Laun-dering and Financial Crimes.” U.S. Department of State. www.state.gov/g/inl/rls/nrcrpt/2005/vol2/March.

International Organization for Migration (IOM). 2005. “World Migration: Costs and Ben-efits of International Migration.” Geneva.

Isern, J., R. Deshpande, and J. van Doorn. 2005. “Crafting a Money Transfers Strategy:Guidance for Pro-Poor Financial Service Providers.” Occasional Paper 10. TheConsultative Group to Assist the Poor. www.cgap.org/docs/OccasionalPaper_10.pdf.March.

Jones, N. 2005. “The Dawn of the Global Neighborhood Community.” Presentation at theMay 26–27 APEC Policy Dialogue on the Role of the Private Sector in Shifting fromInformal to Formal Remittance Systems, Bangkok.

Kempton, J. 2002. “Migrants in the UK.” RDS Occasional Paper No 82. Home Office, London.Komolafe, J. 2005. “Searching for Fortune: The Geographical Process of Nigerian

Migration to Dublin, Ireland.” www.africamigration.com/archive_01/j_komolafe_searching.pdf .

Mailafia, O. 2005. “Migration, Remittances and Development: The Nigerian Experience.”Notes for the July 18–19 Workshop on Migration, Remittances and Development:Challenges for Africa Accra, Ghana.

Maimbo, S.M., and R. Dilip, eds. 2005 Remittances: Development Impact and FutureProspects. Washington, D.C.: The World Bank.

Management Issues News.www.managementissues.com/display_page.asp?section=researchandid=1654Money Laundering (Prohibition) Act, 2004. Nigeria.National Economic Empowerment and Development Strategy (NEEDS). 2005. www.imf.

org/External/Pubs/Ft/Scr/2005/Cr05433.pdfNewland, K., and E. Patrick. 2004. “Beyond Remittances: The Role of Diaspora in Poverty

Reduction in Their Countries of Origin.”Nigeria, Federation of. 1991. Laws of the Federation of Nigeria: Banks and Other Financial

Institutions Decree 1991. www.nigeria-law.org/index.htmlNigerian National Planning Commission. 2004. Meeting Everyone’s Needs: National Eco-

nomic Empowerment and Development Strategy. Abuja. www.imf.org/external/pubs/ft/scr/2005/cr05433.pdf

Nnanna, O.J., and M. Ajayi. 2005. The Payments System in Nigeria: An Overview of thePayments System in Nigeria. Bullion (29)1. Central bank of Nigeria. See online publi-cation at: www.cenbank.org/out/publications/reports/gov/2005/1contents%20page%20and%20overview%20of%20the%20payments%20system%20in%20nigeria.pdf

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Organization for Economic Co-operation and Development (OECD). 2004. “Round Tableon Sustainable Development: Working Abroad–The Benefits Flowing from NationalsWorking in Other Economies.” Prepared by A. Harrison assisted by T. Britton and A.Swanson. www.oecd.org/dataoecd/30/20/32297831.pdf



Orozco, M. 2003a. “Worker Remittances: An International Comparison.” Project com-missioned by the Multilateral Investment Fund of the Inter-American DevelopmentBank.

———. 2003b. “Worker Remittances: Issues and Best Practices.” Testimony presented tothe October hearing of the U.S. House Committee on Financial Services, “Remittances:Reducing Costs, Increasing Competition, and Broadening Access to the Market.”

Osili, U.O. 2001. “Migrants and Housing Investments: Theory and Evidence from Nigeria.”Indianapolis, Indiana.

Osili, U.O., and A. Pailson. 2004. “Prospects for Immigrant-Native Wealth Assimilation:Evidence from Financial Market Participation.” Indianapolis, Indiana.

OXFAM, Netherlands. 2004. “Bridging the Gap: International Migration and the Role ofMigrants and Their Remittances in Development.” Report on the November 19–20NOVIB International Expert Meeting.

Pena-Montenegro, R. 2004. “Better Remittance Services Can Help Ease Poverty.” Finan-cial Times.

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Map of Formal Flows in the UK-Nigeria Corridor and Current

and Potential Networks forDistribution in Nigeria

In 2004, 10 percent of the official recorded flows to Nigeria through MTOs originatedin the UK, and more than 50 percent originated in the United States. The arrows onthe map show the major remittance-receiving cities in Nigeria, namely, Lagos, Abuja,

Benin City, Onitsha, Owerri, Enugu, and Port Harcourt.Remittance flows in this corridor follow migration routes, as one can see the major

receiving cities are in the Southwest, Southeast, and South-South geopolitical zones ofNigeria, which happen to be the source of the diaspora in the UK.

Banks are the only institutions authorized to pay remittances in Nigeria. However, thepost office has an extensive network that is underutilized for distributing remittances.Flows to Abuja can be explained by the presence of Southwest, Southeast, and South-Southindigenes who receive funds from relatives abroad.

81

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Trees*

203*40' in height and 6–8" in diameter

Total Energy

141 mil.BTUs

Net Greenhouse Gases

17,498Pounds Co2 Equivalent

Water

73,944Gallons

Solid Waste

9,544Pounds

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UyoUyo

Jos

AwkaAwka

YolaYola

GombeGombe

KanoKano

Asaba

YenogoaYenogoa

Akure

Minna

Dutse

IlorinIlorin

BauchiBauchi

KadunaKaduna

Sokoto

Gusau

Lokoja

Ado-EkitiAdo-Ekiti

CalabarCalabar

AbakalikiAbakaliki

UmuahiaUmuahia

MakurdiMakurdiOshogbo

JalingoJalingo

KatsinaKatsina

Abeokuta

DamaturuDamaturuMaiduguriMaiduguri

BirninKebbi

LafiaLafia

BORNOBORNO

YOBEYOBE

ENUGU

AN

AM

BRAA

NA

MBRA

ABIAIMO

AKWA-AKWA-IBOM

CROSSRIVER

RIVERS

D E L T AD E L T A

B A U C H IB A U C H I

J I G A W AJ I G A W A

KANO

K A T S I N AK A T S I N A

S O K O T O

KEBBI

N I G E RN I G E R

K A D U N AK A D U N A

FEDERALCAPITALCAPITAL

TERRITORYTERRITORY

P L A T E A UP L A T E A U

T A R A B AT A R A B A

B E N U E

K O G IK O G I

OYO

O G U NO G U N

LAGOSLAGOS

OSUN

O N D OE D OE D O

K W A R AK W A R A

ZAMFARAZAMFARA

EKIT IEKIT I

EBONYI

BAYELSABAYELSA

NASARAWANASARAWA

GOMBEGOMBE

Onitsha

Enugu

OwerriOwerri

IbadanIbadan

BeninCity

PortHarcourtHarcourt

LAGOS

AbujaAbuja

ADAMAWAADAMAWA

NIGERIA

CAMEROON

NIGER

BENIN

CHAD

Onitsha

Uyo

Jos

Awka

Yola

Gombe

Kano

Asaba

Yenogoa

LAGOSEnugu

Akure

Minna

Dutse

Owerri

Ibadan

Ilorin

Bauchi

Kaduna

Sokoto

Gusau

Lokoja

Ado-Ekiti

Calabar

Abakaliki

Umuahia

MakurdiOshogbo

Jalingo

Katsina

Abeokuta

DamaturuMaiduguri

BeninCity

BirninKebbi

PortHarcourt

Lafia

Abuja

BORNO

YOBE

ENUGU

AN

AM

BRA

ABIAIMO

AKWA-IBOM

CROSSRIVER

RIVERS

D E L T A

B A U C H I

J I G A W A

KANO

K A T S I N A

S O K O T O

KEBBI

N I G E R

K A D U N A

FEDERALCAPITAL

TERRITORY

P L A T E A U

T A R A B A

B E N U E

K O G I

OYO

O G U N

LAGOS

OSUN

O N D OE D O

K W A R A

ZAMFARA

EKIT I

EBONYI

BAYELSA

NASARAWA

GOMBE

ADAMAWA

ACCRA LOMÉ PORTO-NOVO

ABUJA

MALABO YAOUNDÉ

N'DJAMENA

NIAMEY

OUAGADOUGOU

MALINIGER

CHAD

NIGERIA

CAMEROON

EQ. GUINEA

CENTRALAFRICANREPUBLIC

GHANA

TOG

O

BEN

IN

BURKINAFASO

0° 5° 10° 15°

0° 5° 15°

15°

10°

15°

5°

IBRD 34621

NIGERIA

REMITTANCES TO NIGERIANETWORKS FOR DISTRIBUTION

(CURRENT AND POTENTIAL)

GEOPOLITICAL ZONES:

NORTH WEST

NORTH EAST

NORTH CENTRAL

SOUTH WEST

SOUTH SOUTH

SOUTH EAST

SELECTED CITIES AND TOWNS

STATE CAPITALS

NATIONAL CAPITAL

STATE BOUNDARIES

INTERNATIONAL BOUNDARIES

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

JUNE 2006

Sources: World Bank interviews in the U.K. and Nigeria, and the Central Bank of Nigeria (CBN).

N/A

TOTAL OF POSTAL OFFICES PER STATE (POTENTIAL):

TOTAL OF BANK BRANCHES PER STATE (CURRENT):

data not available

0 – 1516 – 3031 – 4546 – 60> 61–

0 – 5051 – 100101 – 150151 – 200> 200

MAIN DESTINATIONS FOR REMITTANCE FLOWS

GERMANY(4%)

UNITED STATESOF AMERICA

(55%)

CANADA(3%)

OTHERS(28%)

UNITEDKINGDOM

(10%)

THE WORLD BANK1818 H Street, NW

Washington, DC 20433 USA

Telephone: 202 473-1000

Internet: www.worldbank.org

E-mail: [email protected]

ISBN 0-8213-7023-5

The UK-Nigeria Remittance Corridor is part of the World Bank

Working Paper series. These papers are published to communi-

cate the results of the Bank’s ongoing research and to stimu-

late public discussion.

This study is the first research work on remittances conducted

in Nigeria and reveals the actual state of its remittance market.

The report describes how United Kingdom residents of

Nigerian origin transfer remittances home and how the funds

are distributed to their beneficiaries in Nigeria. The review

presents the remittance industry conditions existing in the UK-

Nigeria remittance corridor at the origination and distribution

stages of the transactions, and the intermediaries who facili-

tate the transfers. The report makes conclusions and compares

these main findings with lessons from other corridors.

The UK-Nigeria remittance corridor has an equal dominance of

formal and informal remittance intermediaries. Although sev-

eral formal financial institutions for transferring money exist in

the UK, many people choose to send money informally. More

collaboration between the UK and Nigeria is necessary to

develop the remittance market, to encourage the use of formal

channels, and to enhance the development potential. Among

its benefits, the remittance country partnership (RCP) between

UK and Nigeria aims to reduce the cost of remittance transfers.

The Nigerian government is engaging its diaspora to help spur

economic growth. This report recommends that each

government focus on improving data collection at its end of the

corridor and do more research to provide its policymakers and

its private sector with accurate information.

World Bank Working Papers are available individually or on

standing order. Also available online through the World Bank e-

Library (www.worldbank.org/elibrary).